Figuring out trends in housing, construction and property

Bright prospects ahead for construction. That’s the forecasters’ view

Brian Green

UK construction by 2018 will have witnessed a five-year growth spurt not seen since the 1980s. That’s what is suggested by the majority verdict among the latest batch of industry forecasts.

Taking Construction Products Association forecast numbers, from 2013 to 2018 the industry output will have expanded by a quarter. Only in the post-War era up to the 1960s and in the late 1980s did construction enjoy growth of that magnitude over a five-year period.

This will, if it happens, put huge stress on the depression-depleted resources of an industry already looking to imports of materials and labour to cope with rising demand. Which is, perhaps ironically, one of the risk to the growth forecast.

This resurgence in construction since the start of 2013 has been down largely to fast expanding housing work, especially new build. In the seven quarters 2013 Q1 to 2014 Q3 new housing output rose by 40%. Much of this will be down to the boost from Help to Buy. There has been a longer term upswing since the darkest days of recession, which has seen the new housing output rise 80% since 2009 Q3.

The majority view among the forecasters is that growth in house building will remain strong this year, but ease in 2016. In terms of the value of output this will see all new house-building work rise above its 2007 peak this year.

Forecasts feb 2015The majority view is that all other sectors will grow over the next two to three years. But there is, among the four forecasts covered here, a dissenter from the full-steam-ahead view of the future. The Hewes forecast, which tends to take on board more of the downside risks, suggests solid growth this year, but a dip into recession in 2016. It expects most new-work sectors to flag.

Hewes takes the view that house building, the big driver of recent growth, will falter in 2016. It expresses concern about a downturn in the cyclical commercial market and does not share the other forecasters’ optimism that the talk of more infrastructure work will convert to a boost to actual construction output.

Its view on direct public sector spending on construction is similarly much bleaker than the other forecasts.

Set against the three other forecasts which appear fairly consistently positive in outlook, the view presented in the Hewes forecast appears very downbeat. But it is worth noting there is considerable divergence in views over each of the construction sectors.

This is perhaps most evident in the infrastructure sector where Experian expects an expansion of more than 40% compared with CPA at 30%, Leading Edge at 15% and a drop of 5% in the Hewes forecast.

Certainly the infrastructure sector is giving forecasters the biggest headache at the moment. There is much talk of work in the pipeline, but the uncertainty over the work is high.

The good news on uncertainty is that the downside risks look less worrying, despite yet another saga of confusion over what will happen in the Eurozone following the Greek elections. But as mentioned earlier, supply constraints may act as a dampener.

Importantly the UK economy does seem to have found a firmer footing since 2012. Then, in the face of flagging growth, the Government appears to have eased on austerity (despite rhetoric to the contrary) and it also pumped money into the system through Funding for Lending. This in turn supported Help to Buy. This boosted mortgage approvals and consequently house building rose to meet the expanded demand.

The overall effect of these policy tweaks seems to have been to turn an extremely dismal economic performance over the previous two years into something more solid.

History and the data suggest it is solid economic growth that pumps life into construction. For my money this does support the view that construction will see growth, unless the economy is hit by a nasty shock.

One other factor that supports economic growth and suggests a bolstered underlying demand for construction is the expansion in the population.

It’s hard to quantify the specific level of demand for construction created by a growing population, but why not let’s try to get a handle on the scale?

Let’s assume each extra person needs the same share of the built environment as those already here. On current figures that comes in at about £80,000.

(The ONS put a replacement value in 2013 on the total stock of UK built environment that is in use at about £5.2 trillion. That’s the gross capital stock figure. The net capital stock, which takes into account that some of it is well worn, came to about £3 trillion. That means there was in 2013 about £47,000 worth of built environment per person, which would cost about £80,000 to replace.)

The population is growing at between 400,000 and 500,000 a year at present, according to ONS estimates.

To meet that increase on our assumptions would take investment of £30 billion to £40 billion. That’s about a quarter to a third of the current investment in the built environment.

Back in the 1990s the population was growing annually by between 130,000 and 210,000. In very round figures this suggests investing between £10 billion and £20 billion a year to provide for population growth.

Boiling it all down the industry needs to be about £20 billion or so bigger than in the 1990s just to accommodate a faster growing population. Add in the backlog of work left as the industry shrank during the recession and there’s a hint at potential demand.

Naturally the relationship between the built environment stock and the population is not linear. On one hand we use buildings more efficiently, reducing the demand. On the other hand we want better buildings and more space so we need to spend proportionately more. In all that there’s the muddle of what buildings and structures we actually need to match the type of society and economy we want and how much we are prepared to invest.

But it’s worth noting the ONS estimate of the replacement value of the built environment has doubled in proportion the population since the 1970s.

The key message from that crude data doodling is there’s potentially very strong underlying demand for more buildings.

Not least among them would be more houses.

The big question, as always, is who will invest and how much to do what?

A £20 billion repair bill to fix the UK construction industry after the recession

Brian Green

Just what has been the cost to construction of the recession? Could and should policymakers have made the slump in activity less painful? Were there better policy options?

These questions need desperate attention. Mistakes were made. Bad and avoidable mistakes, in my view. Lessons must be learned.

Construction is a strategic industry. Having a construction industry is not an option for any nation. That makes it special, like health, education or defence.

Recessions can disproportionately hit construction. The damage, however, will eventually need repairing and that comes at a higher or lower future cost depending on policy decisions made when the recession bites.

In any sensible world, policymakers would estimate that cost and factor it in before deciding whether to cut or boost public investment and whether to incentivise or not private investment. They should be aware of the cost of recovery when assessing the value of investing in the fruits of construction.

From what I have observed over the past six years, I doubt that crosses their minds for more than a fleeting moment.

So let’s see if we can start exploring what damage was done and put a figure on the cost to put things right, even if we start from back-of-an-envelope sums.

The severity of the damage caused to construction by the Great Recession is patent. Two impacts on the UK industry are hard to ignore. They are currently a source of grave anxiety for businesses and policymakers. The loss of skills, or human capital as economists might describe it, has been huge. The depletion of physical capital and capacity within the whole supply chain is significant.

There has been, however, massive but less immediately evident damage caused by half a decade in an economic quagmire. The construction industry’s reputation, never that splendid, as a career choice for young folk has once again been tarnished. And a particularly worrying concern must be the potential damage to UK contractors, particularly large firms, caused by six years of less-than-prudent bidding.

It was all rather predictable, but the fallout from imprudent and suicidal bidding is yet to be realised and is very unpredictable. Many contract periods are long, so the final bills are yet to be settled. And the final settlement on a contract is far less straightforward than many might suppose. While the effects are being seen in the accounts of contractors, it will be sometime yet before we can measure the full damage.

As Warren Buffett would say: “Only when the tide goes out do you discover who’s been swimming naked.”

The cost to repair the damage to corporate structures is hard to assess. There will be loss of goodwill, expensive restructuring and thousands upon thousands of hours spent sorting out the mess. Organisation knowledge will be lost as yet more human capital is thrown to the wind. On the upside, change might force some improvements.

In finding a figure for the cost, it might be worth starting by examining human capital. The concept may seem a bit wishy-washy, so it might be instructive to see the estimates by the Office for National Statistics. ONS estimates the loss of human capital between 2008 and 2012 was £1.1 trillion. Falling from £18.2 trillion to £17.1 trillion

Just playing with the figures and assuming human capital were spread evenly among the nation’s workforce, which it isn’t, the value of the human capital in construction in 2007 would be about £1.18 and in 2012 about £0.93 trillion. That would be a loss of £250 billion.

The scale is mind-boggling. Now while this huge figure may be within an order of magnitude of the loss of human capital to construction, it’s clearly miles away from the replacement cost. Most human capital is accumulated out of the workplace and work-related training, but much is associated with working.

A more pertinent question might be how much would it take to train a replacement for each worker lost to the industry? We should be able to come up with some reasonable guesstimate figure for this.

I was given for a blog some years ago a rough-and-ready figure of £30,000 for the total cost to train person and provide on-the-job experience from scratch to become skilled in construction. It must be remembered that formal training is just part of the cost. Skills are acquired over time when productivity is lower than it might otherwise be and supervision higher, representing a cost to the firm.

This figure can only ever be crude given the range of skill levels and ages within the industry. It is probably light when all costs are taken into account and the cost to train senior people will be much higher, but let’s work with it.

The costs associated with raising human capital are generally absorbed in the normal scope of business, they may attract grants, but the process is in normal times generally a continuous one.

However the industry lost about 400,000 people to the recession. Much human capital was lost for good, much was not replenished as it would have been, which means the industry would have made savings through the recession on training costs.

But now for the flip side. Filling the gap that is left, if it is to be done without a huge influx of foreign workers or be overcome through innovative building techniques, will now mean an expansion of training, formal and on-the-job. This will cost the industry, based on our estimated average figure, £12 billion. No wonder “importing” skilled workers from Lithuania, Latvia and Poland looks attractive.

We can do similar figures for physical capital. Let’s look simply at some figures for net capital investment for the construction materials suppliers from the Annual Business Survey (many thanks here to Dr Noble Francis and his team at the Construction Products Association for the base data).

Ignoring 2008 as it represents a transition into recession, the estimated average net capital investment in the years 1997 to 2007 was £1.41 billion. The figure 2009 to 2012 was £750 million. That means there was an average annual drop of about £660 million. The 2013 provisional ABS figures don’t suggest a major recovery in investment.

A rough count would suggest that over the five years 2009 to 2013 inclusive, the total net capital investment was £3.3 billion less than it might otherwise have been. An investment more or less of this scale will be needed to bring things back to where they were in the material supply sector before the Great Recession.

We then need to consider the collapse in capital investment by contractors, by plant hire firms and by the distributors. The damage to the industry’s infrastructure here will also have to be rebuilt if construction firms are to deliver as effectively today what they could in 2007.

It would not take much consideration of these and other factors before we might reasonably estimate the degradation of the industry from recession will cost at least £20 billion to repair. That’s about £300 per person in Britain and this leaves aside the damage caused to the image and reputation of the industry.

To put that £20 billion in the context of the industry itself, it is about 10 times the total pre-tax profits made by the top 100 contractors in 2007.

Now you can quite rightly argue with these figures. You may feel they wildly underestimate or wildly overestimate the challenge. But it’s hard to dispute that the recession has left the nation with a huge bill to pay if it the construction industry it desperately needs is to be restored to what it was before the Great Recession.

Now ask yourself, was it such a good thing for the government not to invest more heavily in construction when the recession hit?

As I hope to explore in future blogs, there were clear alternatives, what’s more they could have made and saved the government money and, ultimately, reduced the nation’s debt.

Forecasts paint a brighter future for building, but infrastructure data clouds the picture

Brian Green

The latest batch of construction industry forecasts out this week paint a brighter picture of growth for building in Britain, but a confused picture for prospects in the infrastructure sector.

I’ll turn to the confusion later, but for now it’s safe to say that, taken as a whole, the forecasts reflect and seem to support the general improvement in confidence within construction.

Despite recurring concerns over persisting fragility within the global economy, Europe in particular, the Construction Products Association (CPA) suggest a strong bounce back over the next five years.

Forecast autumn 2014 aIt expects growth rates ranging from 3.3% and 5.3% for each of the next five years. This should swell construction by 23% in real terms from 2013 to 2018.

As the graph shows, Experian is equally as bullish over the next three years. Hewes provides the usual useful counterpoint, as this forecast tends to factor in more downside risk, so is inevitably much less optimistic.

All three are extremely bullish about housing in the near term and, while Hewes sees growth fading, the CPA takes the view that growth will continue through to 2018.

Experian and CPA also expect strong growth from the commercial sector, with growth of around 15% over the three years 2013 to 2016. Hewes takes a far more pessimistic view.

Overall new work is expected to be a bigger driver of construction growth than repair and maintenance over the next few years. This is consistent with strengthening growth in the economy and growing confidence among investors.

But the forecasters do see respectable increases ahead in repair and maintenance work.

Pulling all this together the forecasters all upped their expectations for building.

There is however one big twist in the tale of these forecasts this time around, the variation in expectations for new infrastructure work. Rather perplexing official data has led to big disparities in the forecasts for the sector.

Experian and Hewes show new infrastructure work falling this year. The CPA penned in growth of almost 9%.

What is extremely interesting and pretty unusual is that CPA appears to have stepped away from using the ONS construction output figures as its datum for new infrastructure work.

The forecasts says: “Recent statistics from the ONS report that Q2 infrastructure output was 8.2% lower than one year ago and new orders were 32.0% lower than a year ago. These declines contradict surveys within the sector that suggest increasing activity. As a result, the infrastructure forecasts are not purely based upon recent output but also take account of survey and pipeline evidence.”

The suggestion here is that the CPA suspects there may be a problem with the Office for National Statistics (ONS) construction output new work infrastructure series. And, indeed, the performance of the series has raised a few questions of late.

But the CPA decision to forecast away from the data currently presented in the ONS infrastructure series raises some intriguing issues.

Unless the figures are revised upward, for the official output figures to hit the CPA forecast for this sector, on my calculations new work infrastructure output in the final four months of this year would have to be 40% up on the final four months of last year.

That would be a phenomenal and, I sense, an unlikely turnaround in work on the ground.

Then again, a problem may be found in the data and the CPA view could end up matching the official figures through revisions to the back series.

But ultimately whether the CPA forecast and the ONS figures end up matching is just part of this puzzle.

What is perhaps of greater concern is whether there is actually a problem with the infrastructure figures or not. This is a moot point. It reveals just how hard it is to forecast change in construction industry activity and just how hard it is to know with certainty the level of work within the various parts of the industry.

Certainly civil engineering contractors have seen strong growth for a year or so. And there has been much rhetoric and bullish talk about investment in infrastructure. This all points to the data being misleading.

On the other hand we must consider what is actually happening within the industry. Inevitably some of the buoyancy civils firms feel is down to the rising tide of new building work and the ground works and services associated. Could it be this that is boosting civils work and disguising weaker infrastructure work?

Certainly, we have a problem in understanding how much infrastructure spending actually goes on construction work – that is how much goes to contractors suitably coded as being in construction and how much to other firms not classified as construction, such as process engineering firms.

A road job has a large construction element, a windfarm far less. The construction content of water projects will vary depending on the proportion spent on mechanical systems and controls.

There are of course other potential sources of confusion within the data classification and within the collection process.

Are we missing some specially-formed joint venture businesses in the sampling, or underplaying their importance?

Are firms not classified as construction undertaking what is construction work and so work is being wrongly allocated to, say, manufacturing?

Are firms correctly allocating construction works within the forms they fill in for the ONS?

There are a host of possible effects that can distort a data time series.Forecast autumn 2014 bCertainly a variation in the mix of work will have an impact.

So let’s out of curiosity compare the proportion of each subsector within new work infrastructure in the four quarters to Q2 2007 with the four quarters to Q2 2014.

We see there has been a profound shift in the mix of work. Road, water, sewerage and harbour works have declined, while rail and electricity work has increased.

Could it be that a big headline investment in electricity gives the impression of lots of work, but in reality only a low proportion of that work is recorded as construction?

These are questions that need research before we know if a problem with the ONS data is likely or not.

Ultimately without deeper knowledge it is extremely hard to know for sure if the ONS infrastructure time series is a reasonable or unreasonable reflection of the path of construction’s share of the investment in infrastructure.

It is certainly a conundrum and once again illustrates the extreme difficult in measuring each month how big the construction industry really is.


Note: the bottom graph has been replaced since first posting as it originally had 2017 not 2007 in the title.

More a house-building recovery than a construction recovery – so far at least

Brian Green

Construction output grew 0.6% in the first quarter of this year. That’s up on an earlier estimate of 0.3% in the first release of the GDP figures. Work done in the first three month was 5.4% more than in the same period a year earlier.

That’s the very encouraging headline story from the latest ONS construction output data. And we can be more encouraged given the iffier-than-normal weather at the start of this year. This provides reasons to think that underlying growth is more than the figures posted might suggest.

You’d certainly might expect so, given the multitude of construction trade surveys registering sentiment somewhere between positive and ecstatic. It’s dead easy right now to get carried away with the exuberance in some construction circles.

No doubt things are getting better. There’s considerably more optimism about. But after a seven-year slide with a few bumps on the way from the 2007 peak to now, you’d expect to be enjoying better times.

As a point of reference, construction output in 2014 q1 remained 11.6% below that of q1 2007, according to the ONS volume measure.

So, is there a danger that our excitement is running ahead of us?

Nobody can hide the fact that house-building work has been expanding sharply and looks on track for more strong growth. Construction work attributed to private new housing in the first quarter of this year was up 23.1%, says ONS. Mind you it needs another 30% growth to get back to the level we saw in early 2007, which then was described as too little to meet the nation’s needs.

Public new housing is up too over the year. Here I’d be a bit cautious over drawing too much from this, because the distinction between what’s popped in the figures for the public and private housing sectors is increasingly blurred.

Either way new house building is storming compared to its dark days in the depth of recession. On top of this housing repair maintenance and improvement work has bounced back over the past year or so.

Outputq12014Graph1Bearing that in mind, look at the set of graphs splitting housing from other construction work and you get a clue that this so far is more a story about a house-building recovery than a construction recovery.

Outputq12014Graph2We’ve heard much from the Government over the past few years about the need to improve the supply side of the economy and invest in infrastructure. It’s bandied large figures about telling us of its investment intentions.

Well there’s a strong case to argue that it would be good if the Government’s pockets were where its mouth is. The data suggests infrastructure work is almost 10% lower now than when the Coalition took the reins four years ago and 4.8% down on a year ago.

Public other work is obviously down on the year ago as is public non-housing repair and maintenance work. That’s no shock given the cuts to spending.

But private industrial work (admitted a small sector and so quite volatile) is also down.

Outputq12014Graph3Growth in the private commercial sector has been very feeble to date. It’s down more than 10% from where it was when the Coalition took over and inherited what looks like in the figures a mini-revival.

Outputq12014Graph4Looked at in these terms the argument that the Government has built what looks like a recovery in construction on the back of late-in-the-day controversial sector-specific support (Help to Buy) appears to hold more water than George Osborne might like to drink.

Critics, myself included, long argued for more direct Government support for construction much earlier. This would have left the industry with far fewer supply headaches – a depleted and ageing workforce just one – than it now suffers.

Leaving irritation over the past aside and looking from where we are now, there’s plenty to cheer us, despite the rather lacklustre performance to date of non-housing construction work.

All the indicators worth looking at that illustrate what’s coming down the pipeline, architects and surveyor surveys for instance, suggest there is a surge in work heading for building sites around the UK.

There’s plenty too that has convinced the industry forecasters that construction growth will spread out from the housing sector this year.

However, today’s figures are a sober reminder that the recovery we see still has a way to go before it is established as a construction recovery rather than a house building recovery.

Even so, just the smell of better times ahead must make it hard for the wider construction industry not to get excited after seven lean years.

Forecasters see spring in the step of construction with fewer dark clouds on the horizon

Brian Green

The latest set of construction forecasts from Experian, the Construction Products Association and Hewes all exude greater confidence than those released at the start of the year.

There were few radical changes to the expected numbers above adjustments that would naturally be made to accommodate new data. But the sentiment is more encouraging, with concerns over downside risks easing.

Three forecasts compared April 2014Indeed Experian suggest that the balance of risk within its forecast has probably shifted to the upside. The downside risks of squeezed real earnings and renewed problems in the Eurozone have eased.

But the Experian forecast does highlight the relatively newer threat of a house price bubble as a growing downside risk. Meanwhile Hewes points to interest rate rises as a threat.

This does not take away from the fact that all forecasters expect strong growth this year and this in the eyes of Experian and the CPA will be maintained in the medium term.

Hewes, which tends to factor in more downside risks, sees the rate of growth slowing sharply after the election.

The consistent feature of all the forecasts is the strength of the new housing market. The consensus suggests more than 20% growth over the three years from 2013.

Both Experian and CPA are bullish on infrastructure, suggesting growth of about a quarter over the three years from 2013. Hewes view is significantly less optimistic with relatively low growth expected, but no contribution from Hinkley is included as it has yet to secure EU approval.

Another key difference is that Hewes does not foresee a sustained strong recovery in commercial building, whereas both Experian and CPA see a solid and increasing rate of growth. This is a huge sector and so has a large impact on the overall output. Hewes says its relatively cautious position relates to the susceptibility of the sector to higher borrowing rates.

The takeaway from these three forecasts is that the picture is brighter and there are more upside risks emerging while the downside risks ease.

But fragility remains with particular concern over inflation in the housing market and the potential impact of higher borrowing rates, should they come sooner rather than later.

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.

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