Brickonomics

Figuring out trends in housing, construction and property


The official construction figures add to the growing case for cautious optimism

Brian Green

The latest construction output figures provide yet more reasons to suspect that the industry may be pulling itself out of its slough. This evidence is reinforced by the release of the newly-constituted new orders figures.

The construction output data for July show the index of construction activity has risen to its highest level since last October. This measure, which is seasonally adjusted and deflated to account for price changes, stood in July at 95.5 against 100 in 2010. This may not seem that spectacular and it isn’t.

But the rise in this index and its relatively higher level over recent months does suggest the industry may be through the worst, at least for now.

I say suggest because the picture does not look quite so positive if we look at what is happening outside of the private new-build housing market. Output in this sector, which accounts for about 15% of all construction output, was over the past three months 8% up on the previous three and 11% up on the same period a year ago.

It’s also interesting that we saw a slight rise (4%) in private sector housing repair and maintenance over the past three months or so. Whether this is connected to the increased excitement in the housing market is a point of interest. It is a sector worth watching closely as the new-build sector expands.

Residential repair, maintenance and improvement had been in part supported through the recession by people improving their existing home rather than moving. Meanwhile, there is a long-standing view that increased housing transactions also support the sector as people do up homes in advance of sale and when they buy a home.

There will no doubt be much discussion on whether we are now seeing more people doing up their homes in preparation for sale, whether there is just more money around for improvements and the sector is set for growth, whether we should expect a fall in those spending to improve the existing homes rather than more, or whether this is just a blip.

If we look away from both new-build housing and RMI we see that building-related work remains flat if not in decline, while the infrastructure sector is growing gently when measured on a 12-month moving volume basis.

This rather suggests that overall growth in construction is very reliant on housing-related work, which leaves the interesting questions of how far and how fast can this sector go.

Turning to the new orders figures provides more encouragement, if they are taken at face value.

However, this is the first quarter of a new system of data collection, whereby the data is sourced from the information provider Barbour ABI rather than an ONS survey. Any change to the data collection process will have some impact on the results, the precise details of the impact are at this stage pretty unknowable, so I would advise some caution.

(Here I should express an interest in that I undertake some work for Barbour ABI and that it is a sister company of Building Magazine which hosts this blog)

But certainly the picture the latest data present is positive with most sectors seemingly on the up and the recovery seemingly fairly broadly based geographically.

The most reasonable overall interpretation of this latest round of official data is that, failing a nasty knock, the pain should start to ease for many within construction.

However, unless you hadn’t noticed there does seem to be some priming of the economy ready for a General Election in less than two years’ time, unless I’m misreading things.

With funding pumped up by Funding for Lending, Help to Buy underpinning house buying and with a monetary policy more flaccid than damp tissue we might realistically have hoped for some kind of recovery in investment in construction, particularly in the housing sector. It is hard to know what else you could do to boost the private housing sector and appear sane.

Equally pertinent it seems is the lack of bad news emanating from the Eurozone. This almost certainly will have helped the sector, which is very much reliant on business being confident enough to invest.

At this still fragile point what the construction industry needs is for things to stay quiet on the Eastern front and for a recovery in the general economy to take strong hold before the economic drugs injected into the system start to wear off.

What it also doesn’t need is a speculative boom in the property market or anywhere else, if it is looking for the sustainable long-term future needed to rebuild its shredded capacity.

Below orders by region and orders by work type:

Rise in new orders provides some solace, but they remain at very low levels

Brian Green

The latest construction new orders figures will give some solace to some. The need to see growth, any growth, in any construction indicator is desperate.

The top graph shows clearly how new orders for construction have fallen over the past few years and how frighteningly low the level remains.

I remain a shade concerned over the accuracy of this data series just because it does look so terrible and the implications the figures have for construction output – that which actually pays people – are disturbing.

One thing to note about orders is that they do not track with output in any direct way. The measure is more akin to how much the tank is being filled by rather than how much fuel is passing through the carburettor or fuel injection system.

If your tank is full then you can go with putting less in than you use for some while. But sooner or later you have to have a serious refill. That is what the industry has been lacking for some long while. Orders books are being diminished as the big orders let late last decade come to an end.

Leaving all that to one side, the implications of the latest data is that while there are signs of improvement the need for much greater improvement is clear from the graphs above and below.

For me the most concerning graph is that which shows the level of private sector work. This is where we need to be seeing most growth to compensate for the reduction in public spending.

Yes we are seeing a bit of a rise in house building. But overall as the graph shows this is minor when looked at in the bigger picture.

And there are early signs that in some regions, notably the North West, things may be perking up a bit.

But the latest figures, when fully considered, do support the forecasters view that in the short term we have as an industry further to fall.

Anyway I will leave you with a series of graphs and you can make up your own mind on whether the recent upswing in orders is anything to break into song about.

Why we should be cautious about seeing the RICS survey as a signpost to growth in UK construction

Brian Green

The press release headline for today’s RICS construction market survey suggests the industry will turn the corner and grow in 2013. That sounds like encouraging news.

Sadly, it is probably over optimistic and probably overstates the results of the survey.

Sorry to burst one of the all too few happy bubbles you’ll see this year. But there’s a host of reasons to be cautious over the interpretation of the latest survey.

The RICS construction survey provides a useful indication of what lies ahead for those working on the ground, as the work of those surveyed tends to be weighted towards the early stages of construction. It adds positively to the array of construction data.

But like all surveys and forecasts it has limitations and its findings need close interpretation and consideration when there are structural changes within the industry.

Only by knowing what a number relates to can you infer meaning from it.

To get to the point, what initially surprised me when I read the press release was that it suggests growth in 2013, albeit slight. The consensus of forecasts and a wealth of other data point to a fall.

The graph above shows the RICS workload index and workload expectations index against the indexed values of construction output and new orders. Now they are not measuring the same things (RICS is measuring balances of up and down, while the ONS is measuring volume). But on gut feel alone I would be more surprised if the industry grows than if it shrinks in 2013 based on the official data.

Not that I know which way the industry will go next year.

The graph also shows that the balance of optimists against pessimists among the surveyors surveyed has been pretty positive for some while.

That said the RICS’s calculation of the growth in workload expected by the survey respondents is small, between flat and 2.5%. And it must be noted that this range reflects the fineness of the scale used for assessing expectations of future workloads rather than a judgment on the range of expectations.

So what the survey is saying is that the respondents on average expect the smallest amount of positive growth and on balance many more firms expect to do better than worse.

But given the way the question is framed we don’t really know whether they are reading growth in nominal (cash) or real terms (adjusting for inflation). If they are not taking into account inflation the survey may be saying slightly nominal growth, but probably a real-terms decline, assuming inflation at 2.5%.

To my knowledge the survey does not weight respondents according to their size. This is not necessarily a major fault given the purpose of the survey, but it means that there is greater uncertainty over actual volumes in the results.

There are other technical issues that need to be accounted for. The question asks how firms expect to be doing.

It’s well known that in normal circumstances if you ask someone how they expect to do they will tend towards being positive. This optimism bias may well be boosting the figures. If we look to the Markit/CIPS construction survey, its expectation results are wildly optimistic when judged against what actually happened.

In fairness in times of huge stress respondents can get carried away and overstate the negatives leading to a pessimism bias.

And if we want to get more technical we should also take account of the possibility of survivor bias. Firms that have just gone bust don’t fill in the forms, so the sample is skewed towards better performing firms.

But there is an important point to be taken into account that relates to changes in the real world, rather than the fraught problems of surveying businesses views. In October I thought to question the optimism I found then in the RICS construction survey.

I suggested that the survey have been influenced by surveying firms doing increasing amounts of overseas work in the UK.

The Office for National Statistics figures for turnover among architectural and engineering services show a near 9% rise in nominal terms in turnover, albeit a crude measure, over the past year. This follows a period of relatively strong growth.

Interestingly too, when we look to the ONS Pink Book, as I did in a recent blog, we see that there is a growing positive trade balance in the value of services traded.

This suggests UK-based surveying businesses are filling their order books ever more with work being done abroad. That’s brilliant and should be applauded.

The danger for this survey is that when asked “how’s business look in the year ahead?” they are talking about business in general as much if not more than business in the UK.

So naturally they will be more optimistic than the UK construction market would lead them to be.

For all these reasons I would be very cautious about concluding from the RICS construction survey that the industry has turned a corner, especially if you think the corner heads upward.

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 >

ONS correction to new orders data adds more black eyeliner to a Gothic horror show

Brian Green

It would be easy to attack the Office for National Statistics for miscalculating the new orders figures by £1.2 billion for the second quarter of this year.

Yes it’s embarrassing for the organisation. The folk there don’t need me or anyone else to tell them that. By all accounts there was a glitch in the system which chucked out a rare error. Read more >

Time is running out for construction as private sector new orders run thin

Brian Green

The latest new orders figures from ONS once digested will inevitably leave the construction industry feeling hungry and wondering where its next meal is coming from.

Some will note the quarter-on-quarter rise of 0.2% and the 11.1% rise in the second quarter compared with the same time last year and foolishly suggest this represents improvement.

They would be wrong. If you ignore the public sector data (which bounced up slightly in the quarter), the direction of orders was distinctly down quarter on quarter by more than 6%.

Why should we put to one side the public sector contribution in these figures?

Read more >

Case to boost construction grows as ONS figures reveal an industry accelerating into recession

Brian Green

The latest construction output figures suggest the decline is the industry is gathering pace. Read more >

Skyscrapers and economic crises revisited. A soothsayer’s perspective on the Shard

Brian Green

I’ve been increasingly worried about the possible collapse of the construction industry into a rather deep recession for some time.

I have tended to keep my concerns in check, having gained a reputation for being gloomy.

But while it’s tricky to tell accurately with the available data, the new orders figures just don’t seem to be healthy enough to me to support the current level of construction output. Ergo – to my mind at least – a nasty drop in output of new work seems highly probable. Read more >

Output data add to worries over private sector weakness as public sector cuts hit workloads

Brian Green

The latest output figures released by the Office for National Statistics on Friday appear to support growing concerns that the decline in construction workload might be accelerating.

Analysis of the data suggests that as the decline in public sector work is gathering pace the recovery in the private sector is petering out. Read more >

 
Awards
Events/Conferences
Sister sites