Brickonomics

Figuring out trends in housing, construction and property


The construction industry is £1.5 billion bigger and growing faster than we thought last month

Brian Green

The annual turnover of the construction industry is about £1.5 billion bigger than we thought it was last month and it is growing much faster.

That really is the big story from the latest estimate of construction output made by the Office for National Statistics.

This is pretty big news. It means that the estimate for GDP will be boosted by about 0.1% as a result of the revisions to the construction output data. So we should expect to see the consensus forecast for GDP growth in 2013 rise from 1.4% to 1.5%, all other things being equal.

OutputMeanwhile these revisions leave industry forecasters scratching their heads wondering what it all means for the direction of construction growth.

The chart shows output on a three-month (blue) and 12-month (red) moving average basis. There is not much impact on the annual figure, but as you can see from comparing with the previous months three-monthly data (orange) the recent growth is far stronger.

The reasons for the upward revisions, which added about £2 billion to the volume measure of work done by construction firms over the past seven quarters, are broadly down to late data, revised seasonal adjustments and, it seems, some changes to how inflation is measured.

Within the data filed late category the worst laggards seem to be civils firms. So this sector has been boosted quite a bit, although there appears to have been some reclassification from repair and maintenance to new work. There was also a fairly large upward revision to the current price data for housing repair and maintenance, private industrial and private non-residential repair and maintenance work.

To add to this uplift there were adjustments to the seasonal adjustments and there also seems to have been some changes to the indices used to adjust for inflation. The upshot is ONS now think there was more work done than they thought last month.

Looking through these revisions and at what the data might all mean, the signs seem very positive.

There’s no surprise that private housing is driving growth, with about 8.5% more work done in the first 10 months of this year than last year. But, in part due to the revisions, private commercial also now seems to be cantering along nicely and looks on track for a rise of about 4%. That represents a major turnaround since the last set of industry forecasts, when there was fear of a further fall this year.

The message ONS is sending to construction firms with this latest estimate of output is clearly seasonal:

“Have a Merry Christmas and look forward to a Happy New Year”.

August dip of no concern as signs grow that construction is pulling out of recession

Brian Green

Despite the slight tick downward in the ONS seasonally adjusted construction output figure for August the signs are growing that the industry is pulling out of recession.

There are many ways to measure growth, but looked at on a 12-month rolling basis output (using the non-seasonally adjusted data) seems to have bottomed out in May 2013 and we have now seen three months of improvement.

This is clear from the graph, which also shows that measured on a three-monthly basis the improvement is encouraging.

Taking a pretty optimistic view, if all goes well and with favourable revisions the industry might be looking at quarter-on-quarter growth of about 3% for the third quarter to add to the 1.9% growth enjoyed in quarter two.

Not surprisingly the figures are boosted by acceleration in new private house-building activity. The index figure in the ONS data puts activity in August at 118.6. That’s pretty much where things were in the late summer of 2008. Yes, much better, but still a long way short of the 165.1 seen at the start of 2007.

Housing activity is certainly not at the 10-year high the new housing minister Kris Hopkins seems to think it is, judging by a recent tweet he put out.

Even taking new housing out of the equation there are tentative signs of growth since June.

There are of course worries. Public sector spending is still declining and it is unclear when this might bottom out. So we should expect this to remain a drag on growth for a little while longer.

Of more concern are signs that the infrastructure sector may be running out of puff. Output in this sector tends to be erratic as it can be influenced greatly by big projects, so it can be tough to read. But the data of late have not been that comforting.

On the more positive side the private commercial sector does seem to be bolstering growth. Again, its growth path has been slightly bouncy over the past few years, but the good news is that in recent months it has been bouncing up more than down and there are distinct signs of growth since the start of the year.

What is quite remarkable and disturbing, given the low base and that growth is in its early stages, is the pressure that this has exerted on the supply chain.

Output remains about 13% below its peak level and more than 7% down on the 2010 level, but we are hearing increasing numbers of complaints about the lack of skilled labour and the dangers of materials availability and price increases.

What is unclear is how much of a drag this might have on construction.

Today’s GDP figures and why I think Government remains totally wrong on construction

Brian Green

The GDP data provided the Chancellor George Osborne with solace. The 0.3% quarterly rise allowed him to suggest the figures provided evidence that the economy is healing.

Had the figures shown a decline he would have been fending off a huge amount of flak. That’s politics.

But the figures mean little in the grand scheme of things unless they work some magic on the animal spirits within the economy.

The economy is probably rising very gently, but far too slowly for comfort. And there is little to guarantee that we will not see another quarterly drop in national output drop before the economy finally lifts from this depression.

It is the longest depression for more than a century. And with the full impact of austerity still to bite there remains the likelihood of a very bumpy and uncertain take off.

No one is quite clear where we should expect to see growth, especially as demand from our biggest trading partners, by and large, is also being squeezed by austerity.

For construction the GDP data seem to fit the glum background. The GDP index for construction hit 98.0, the lowest level since Q1 1999. Five years earlier it stood at 120.8.

And most pointers (though not the RICS latest construction survey) seem to be for a continued fall in output, at least this year.

The GDP first estimate figures are open for some quite big revisions, so should be taken with caution. But even taking that into account, they don’t look good for construction.

This is twisted irony. For those in construction there is a deep-seated belief that this industry should be playing the lead role in driving the economy.

Yes, it should. But it will not unless demand is there.

There are things construction firms can do to increase demand, but as the industry is structured it is in the main a passive recipient of derived demand. Someone else has to want what it provides, have the finance to cover the cost and the willingness to take risks.

That rather begs the question, why would private sector investors pump cash into the fruits of construction now?

The private housing market is dysfunctional. If it wasn’t there would be no need for unprecedented interventions by the Government.

The market for shops and offices is going through a once in a generation transformation thanks to the internet and changing pattern of work and shopping. That is before we take into account the impact of the very weak economy.

There is limited experience in financing infrastructure in the private sector outside of that which is regulated and the appetite remains a bit fitful and fanciful.

Yes there are pockets of need and opportunity that the private sector will grasp willingly. But these are limited and with better investments elsewhere it is pretty clear that a wait-and-see policy is a likely approach to be taken by prudent investors in such a risky climate.

That leaves the Government as a client or as a promoter.

I would argue when the animal spirits within the private sector are so skittish it is time for the Government to step up with a bit of backbone and lead the way. That was the lesson of the post-War era.

Well the Government probably believes it is stepping up. But it’s record to date, and this includes to a slightly lesser extent the previous administration, is to fiddle with the existing market.

The policy response has been largely focused on providing compensation from the public purse to encourage firms to do what the Government wants. This is exceedingly interventionist and not in my book very free market.

What is more it seems from the outcomes to be a classic case of the weight of unintended consequences potentially exceeding the weight of intended consequences.

From what I can deduce it has proven a very expensive way to do what appears to be not a great deal, except improve the corporate base and profits of some firms.

In fairness we will never know how bad things might have been without the interventions. But to attempt to prop up a dysfunctional marketplace for construction’s output is full of risk.

No. If you want something built, build it rather than trying to bribe someone else. This to me is far better than providing ill-directed incentives however well intentioned.

Simplistic? Maybe. Keynesian? Probably. But to me it makes complete sense for direct Government investment in construction.

The fruits of construction have an exceedingly long shelf life. They last beyond economic cycles. Impressively the value has a habit of increasing over time and the benefits of well-targeted construction pave the way for more efficiency within the rest of the economy.

The fruits of construction provide jobs.

The fruits of construction improve lives.

The fruits of construction are a totem for confidence.

The fruits of construction can be traded between the state and the private sector. We have seen a huge divestment of state assets over the past 30 years.

So why not directly invest in construction now?

The debt?

That is increasingly a ridiculous response.

The cost of debt is clearly not an issue. The Government can buy debt at less than the rate of inflation. In real terms it is being paid to take someone’s hard earned cash.

If the Government is worried about the stack of debt, why? We had huge investment post-War when the national debt was far greater than it is today.

Surely, then, the reason the Government is not investing is fear over the deficit?

This is absurd. Do we really think the gnomes of Zurich or the slick traders in London and New York would give a damn about an extra few billion quid set against tangible assets that can be sold on if necessary, especially as creating them would reduce social security spending and increase taxes.

And, if the Government is a bit squeamish on this point, it could always invests through a not-for-profit limited-life arms-length vehicle that controlled the assets built and was mandated to sell all its assets by some fixed date. This would give confidence to the markets.

No the reason would seem to be dogma.

This to me appears to be the same dogmatic attitude that the current Chancellor accuses his opposition predecessors of adopting. Doing something that is not right, but that fits with a theoretically constructed view of the world.

History would tend to suggest that state investment in construction does not crowd out the market. If anything the data suggests the reverse. Look at the peak periods of house building.

This Government talks of how Government needs to be more business-like.

Well, the Government is uniquely placed in the market to deliver construction goods at a massive discount, once it realises reduced benefits payments and increased taxes.

Any business worth its salt would not shirk at such a golden opportunity.

If as the Government says we need more houses, we need more roads, we need better infrastructure. There will seldom be a better time to invest in them than now from a national perspective.

Put aside the issue of ultimate ownership, put aside fears over picking winners, put aside dogma.

Let’s ignore issues of private or public ownership, they are fluid. Let’s invest in the future and build today what we need tomorrow. 

Frankly, in a decade’s time when hopefully the economy really as healed, the Government can choose if it wishes to rein back on its capital spending and sit smugly there knowing it invested at the right time.

The latest construction output figures are very disturbing

Brian Green

The graph probably says it all. The construction output figures are looking very disturbing. This will not come as a surprise to many, but the confirmation of fears provides little solace.

Yes we can blame the weather. Yes we can note that the figures bounce about a lot. Yes we can find comfort in the possibility of revisions.

But as they stand and as far as you can make out from the historic data the figures suggest that construction probably has just had its worst three months on a non-seasonally adjusted basis since 1995.

What the data are saying is very concerning. The most distressing aspect is that the largest sector, commercial building, is faltering.

Here the amount of work done over the three months to February is recorded as being 16.4% down on previous three months and 9.8% on the same period a year ago.

Meanwhile, private housing was down 17.1% on the previous three months and 7% on the same period a year ago.

We know the direction of public spending on construction. Down. The work carried out on public non-housing new construction was 23.7% less over the three months to February compared with a year ago. And other elements of the public sector are performing almost as badly.

This means the private sector will have to make up for it if the industry is not to fall sharply.

In terms of scale this means we need the private housing and commercial sectors to shine. They clearly are not, despite the Government lavishing attention and pumping in public cash and providing guarantees to help boost the housing sector.

Those who are looking to the infrastructure sector for salvation will also be distressed to see output down 14.9% in the three months to February compared with the previous three months and 7.6% down on a year ago.

It is hard to know where the recovery will come from. The orders figures have been distessing for some while. Despite this the engine of London has kept much of the industry ticking over, partly with projects coming back on stream having been shelved when the financial crisis hit.

But now the orders figures in the capital are starting to look ever shakier and the backlog of projects on hold that might be reinstated has diminished.

There is always the possibility that the statistics contain a glitch and things are not as bad as the published data suggest. To think that would be to clutch at straws, even if there are errors in the data.

The noise from the industry is increasingly the sound of discomfort. The figures could be wrong. But that does not mean things are not ugly out there in the real world of construction.

I will say it again. This is the time that the Government should be buying construction and it should be buying construction in truck loads.

Why GDP growth is the most likely salvation for construction

Brian Green

There’s constant talk of this growth policy and that growth policy centred on construction. Big-looking numbers are bandied about. Then not a lot happens.

Perhaps that’s just politics in the modern media age where it is assumed that the memory of past policies is overwritten by the latest.

Cynicism aside, while the flim flam and bluster of politics is a barrier to getting useful things done, more worrying to me is a seeming lack of understanding of scale.

Put simply if we want to do anything of note with construction to turn the tide of the economy it must be huge, really huge. What is more it has to work. It seems foolhardy to base policies on speculation and hope.

Despite the bragging of lobbyists and the wishful thinking of industry leaders, the impact of most Government interventions pale against the larger economic forces.

Yes Government interventions can be important, but ultimately what has driven the fortunes of construction over the past half a century has been GDP growth. And the strong link with GDP growth and construction growth is not limited to the UK.

To illustrate this and in the name of efficiency I shall recycle some charts from a recent presentation to CIC Economic and Policy Forum. My central point then was that the Budget measures were pretty piffling given the scale of the challenge and the economic environment and expectations.

The first graph compares GDP growth and construction output growth over three years. This seems a reasonable timescale over which to judge the two and it also dampens the noise. I have added the GDP forecast from the Office for Budget Responsibility (OBR) in a dotted line.

It is clear that construction is very procyclical. Certainly we see that when there has been little GDP growth over three years construction has dived into recession.

The second graph shows the comparison with construction new work. The relationship is far more severe.

This third graph plots the three year growth rates for GDP and construction output for the past 50 years. What we see is a pretty strong correlation. Interestingly on the five occasions when the three-year growth rate for GDP has been negative we have seen no construction growth over the same three years.

The coloured dots on the trend line are derived from the OBR forecast for GDP growth, suggesting where three-year GDP growth will be as it rises from 2013 to 2016.

Crudely put you might expect on average to need about 7% growth in GDP over three years to see construction growth over the same timeframe. Worryingly the consensus of forecasts published by the Treasury suggest GDP growth over the coming three years of about 5%.

Now there are a lot of base effects (where are we now relatively?) to take into account. But the figures don’t provide much room for optimism, particularly as private sector investment in construction (the bulk) will be in large part determined by the path of the economy.

The final graph shows the public sector proportion of the nation’s gross fixed capital formation for dwellings, other buildings and structures. It is not a perfect measure, but it does suggests that the public sector accounts for somewhere between 20% and 30% of the fruits of construction and the proportion is falling.

So for the public sector to have a meaningful direct impact on construction it would seem the scale must be large.

Alternatively the public sector could spend a bit less if it could find effective ways to lever new private sector investment. But for my money such a policy really should be based on what we know will work rather than on some speculative albeit well-meaning hope of what might work.

Recent public sector policies have focused on prompting private sector investors and businesses into building and on coaxing households to buy more new houses. In a sense seeking to prop up the collapsed market.

These were always suspect. In housing there is a market failure that predates the financial crisis. In the commercial sector there is huge structural change. In infrastructure there is the ever present level of high risk, and the economic uncertainty doesn’t make that attractive against investment elsewhere.

Furthermore dragging on all these markets has been the dead weight of negative, slow and no growth in the economy overall.

So it is little wonder that the prompts have not really been that effective, although we don’t know the counterfactual. Maybe construction activity would have been much worse without these interventions.

The other side of policy has been to point to supply-side inefficiencies, such as planning. Frankly improving the efficiency of the processes is a long-term fix and it is extremely unlikely that such policies will be effective enough to perk up construction in the short term. Rather such policies introduce the possible danger of confusing investors with uncertainty and changes to the ground rules.

All that however is a bit of a sideshow debate. The real questions are firstly, how important is it to get construction motoring? And, secondly, what actually should be done now to drive construction growth?

The first to me is simple. Build now when resources are cheap and reap the benefits over the coming decades. Trust me, it’s a good move and a wasted opportunity if you don’t.

The second question is more interesting and stewed in the politics of the day. In my view the Government should spend large and spend directly on construction. It can borrow extremely cheaply and for all its borrowing there will be an asset of most likely greater value stack against it.

We need infrastructure. We need housing. We need to transform large parts of our cities. We will need all this even more in the future when it will cost us more.

In my view we need these urgently and hoping to tease a coy private sector into action when it is quite rightly nervous seems a rather limp approach to a tough problem.

Ultimately the best hope for construction growth will be in restoring growth to the economy. But wouldn’t it be sweet if construction could be a catalyst for that.

2012 was the fourth worst on record for construction growth as output falls 8.4%

Brian Green

So there we have it, the official Office for National Statistic figures show that Britain’s construction output fell by 8.4% last year.

But how can construction output have collapsed so far so fast and there not be howls of pain and frantic action by the Government to bolster one of the nation’s more vital industries?

It’s a puzzle made all the more baffling by the constant appearances on the telly of David Cameron and Nick Clegg in green boots, hi-viz jackets and hard hats.

Each time this happens apart from the debate about whether the trousers should be inside or outside the boots we hear phrases that sound awfully like “housing revolution”, “massive boost to infrastructure”, “unashamedly ambitious”.

With confidence boosters like those over the past year or two you might reasonably have expected a surge in construction activity.

As it happens with the 8.4% fall in annual output the construction industry has just experienced, according to the official figures, the fourth worst annual collapse since 1955. What is more impressive, in a bad way, is that this follows close behind the biggest recorded drop which was -13.5% in 2009.

Now admittedly much of the 2009 loss was clawed back in 2010 and to a lesser extent in 2011., but the construction industry is pretty much back to into the mire it was in during 2009 and looking to be heading deeper into decline. This comes across in the first graph.

With December’s output 15.1% below the level of the previous December, this is not an industry that looks to have a pretty short-term future.

There will be those who look at the quarter-on-quarter growth of 0.9% as a reason to be cheerful. This is probably a mistake if the forecasters take on the industry is well founded. They expect the industry to continue on a downward path this year.

And there are various technical reasons to be cautious over the growth figure posted in the final quarter, given the low base set in the quarter earlier.

However, those with a foot in the infrastructure market are naturally and quite rightly more content. They have seen rising quarterly output from a fairly solid base over the past year. Admittedly there was a nasty fall at the beginning of 2012, but the sector had been riding very high up to that point.

There will be not too many complaints from the private house builders either. Yes they see the case for building more homes. But while they may not be building as many as they think they should be, indeed construction output in the sector was 4.5% down over the year, they are working very profitably again.

Looking across the rest of the industry is rather like surveying a battlefield scene three years into World War 1 in the company of an Army chief. He might construct a case for success based around small victories, but at what cost?

Let’s just take the private commercial sector as an example. If the construction sector is to see growth this sector is vital.

Now you can point to the construction of spectacular towers in London, but overall the sector is a third smaller now than it was in 2008.

The second graph shows how each sector has fallen on the year, while the third sector shows how the industry grew between 2010 and 2012.

The obvious statement is that there is a lot more red than black. The second statement to make is that while some sectors have done well since 2010, last year there was very little growth to be found in any sector.

In March 2011 The Plan for Growth laid out by the Government said: “Construction will particularly benefit from: the radical changes to the planning system and publication of a rolling two year programme of projects where public sector funding has been agreed as well as a long-term forward view of infrastructure; reforms in the way government procures construction projects; and announcements on the regulatory requirements for zero carbon homes to apply from 2016.”

Given that statement and the constant emphasis the Government puts on construction as a driver of growth, there seems to me to be a choice of three reasonable conclusions we can draw from these latest data.

They are that the Government never really took construction that seriously, it doesn’t really understand construction, or it is just not very good.

I guess there is a fourth conclusion which is a blend of all the above three.

Nicky come lately still doesn’t get it for all his Damascene conversion to capital spending

Brian Green

The Deputy Prime Minister Nick Clegg has realised, he says, that the Government cut capital spending too fast.

After this no doubt a whole industry – construction – is now saying “we agree with Nick”. The sad twist is that in reality it is Nick that now agrees with the industry. Sad because the nation has had to endure a long haul where opportunities were missed and huge damage done. Sadder still because there’s little hope of a meaningful boost to capital spending.

But credit where credit is due. Well done Nick for realising this four years after it was patent that capital spending was an essential tool in lifting both the construction industry and the nation from a prolonged depression.

And yes I mean to be patronising here because I am very, very disappointed with the political establishment.

But there are two points about the “I agree with David Miliband” confessional in The House Magazine that make his late arrival to sanity rather more unsettling for thinking construction folk who can put vested interest aside in favour of the nation.

The first point is his talk of “infrastructure”. From that I get the sneaking suspicion he doesn’t know what he’s talking about. If he means roads, say roads. If he means rail, say rail. If he means houses, say houses. If he means doing up pensioners’ homes, say so. The difference matters.

Yep, big infrastructure projects would help. But if there’s limited cash and we really want to lift the industry and the nation then the focus of capital spending would probably be on improving the current building stock and then building more homes. Not sexy, but every construction economist will tell you a similar story.

We need capital investment in all these things, but we need investment that will provide an immediate and that is the stuff like repair and maintenance and housing.

The second point is that I don’t think he really gets just how important public sector spending is to unlock private sector funding.

If he has to open his mouth to say these things it is a shame that he dilutes the importance of public sector spending.

Build a road and it will attract private sector funding. Improve a neighbourhood and it will attract private sector house building and private sector commercial investment in both buildings and businesses.

So I am sorry Nick, I’m glad you now agree with me, but I can’t say I agree with you.

The construction recession will be deeper – that’s the forecasters latest view

Brian Green

The latest industry forecasts for construction activity are, as expected, much gloomier than they were as recently ago as last autumn.

Both Experian and the Construction Products Association have trimmed their expectations for growth in construction output for this year and next.

Experian is estimating a drop of 8.5% for last year on current data followed by a 3.5% drop this year, while CPA expects a 8.8% for 2012 with a of 2.2% for 2013.

The graph (right) shows how these compare with the previous autumn 2012 forecast.

Both expect 2014 to register growth. So on this basis the current industry recession will be deeper, but not necessarily that much longer than previously expected.

It may seem a bit shocking but the expected drop in 2012 will be the fourth biggest recorded since 1955, following hard on the heels of the biggest recorded fall, which occurred in 2009.

But, as the graph shows, much of this volatility results from the mini-boom created by the stimulus introduced by the previous Government. This put a helpful temporary break on a construction recession that most probably would have wreaked far more damage on the corporate structure of the industry and led to a far more brutal culling of jobs.

Before exploring why the forecasters took a gloomier view of construction, it is worth noting the human and economic implications of these forecast revisions.

Taking the cut of between 2% and 5% to industry output over the next four years implicit in the CPA forecast in very crude terms suggests the industry will be employing between 40,000 and 100,000 fewer people.

Furthermore the nation will be deprived of much-needed housing and infrastructure which would help to improve both lives and the efficiency of the economy.

So why have the forecasters have become gloomier? Well the simple answer is that data are worse. Output is falling faster than expected, so the base is lower.

But also the uncertainties that have surrounded the forecasts for many years have not been resolved. These are dragging on the economy.

However, it should be noted also that were these issues resolved and went badly these forecasts would now look far worse. But that has been written into the forecasters’ commentary for some while. They have consistently said the risks were on the downside and this remains the case.

And if we look to a sector that this uncertainty is most likely to effect, such as private commercial, we see the forecasters have cut their forecasts here quite noticeably.

But in line with this we are also seeing the impact of the continued squeeze on households. Both forecasters have trimmed their expectations for private sector housing repair and maintenance.

The real question is whether they are being over optimistic in their prediction of growth in 2014.

I suspect when we see the Hewes & Associates forecast in a week or so that it will take a far less optimistic position on the medium term.

The good, the bad and the ugly to be found in the latest construction data

Brian Green

This month’s Office for National Statistics construction output figures have provided a conundrum for commentators. Are they good or are they bad? Read more >

Latest new orders figures cast a long dark shadow over construction

Brian Green

The construction new orders figures released by the Office for National Statistics on Friday suggest a truly scary year or more for the UK industry.

We can find some solace in the general rule that it is unwise to take as your guide just one measure of activity in construction, given the trickiness of measuring the industry’s activity. There are much less worrisome measures of construction activity to be found.

But let’s consider what conclusions we might draw if we did take the official new orders for construction data in isolation as our sole forward indicator of work on the ground.

The most likely conclusion we’d draw is that even the very gloomy predictions made by the construction industry forecasters would start to look grossly optimistic.

If you look at where new orders are now, where new work output stands and how the two have been linked in the past (graph right) you might conclude that the new work segment of construction could fall by almost a third.

Read more >

 
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