Brickonomics

Figuring out trends in housing, construction and property


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.

Questioning data, questioning the value of data, glasshouses and stones

Brian Green

Last week’s ONS construction data release caused a few ripples when it showed output dipping in August.

It also sparked some sharp criticism from Chris Williamson, chief economist at Markit – the people that bring you the PMI surveys.

The second paragraph of his commentary reads: “We question the value of the official construction data due to the scale of revisions that occur after data are first release. The signals about the health of the sector and the economy as a whole can be utterly misleading as a result.”

I’m no shrinking violet when it comes to criticising statistics. But I wondered whether the comment was fair, balance or constructive. So is it?

The ONS release suggested a drop in output of 3.9% in August compared with July and a drop of 0.3% comparing August 2014 with August 2013.

It also showed a 5.5% dip in private housing between July and August, which surprised a few people.

Output Oct 2014 1For me there was no great surprise in the figures. Mind you, I wouldn’t have been shocked if the monthly figure went up. It’s an early estimate of one month’s data on the level of construction in various sectors. It is not a snapshot indicator of sentiment.

August was a bit wetter than usual, so it may have dampened output. The industry is in a state of change so volatility is expected. This is particularly true of house builders as they restock their production pipelines. Even when the construction industry is on a reasonably even keel the data are volatile.

Looking at average of output over three months probably gives a better picture. The three months to August showed growth of 1% on the previous three months 5.3% on a year ago. So the data clearly suggest underlying growth, with a possible hint at a easing in the growth rate of late. That is all clear from the top graph, which illustrates the volatility of monthly data.

Should you always expect to be going upward when you’re climbing a mountain? I don’t, not that I climb that many mountains.

What’s more would I, if I were running a construction-related business, be reliant on updates on the level of production at a GB aggregate level to a high degree of accuracy on a monthly basis? Well probably not. A general sense of where things are going at an aggregate level from a few sources will do fine, even if they are contradictory, along with a damn good detailed understanding of my particular markets. So what’s the problem?

What about the issue of revisions? They were pretty big this time around.

Revisions are a pain. But then again not revising the past when you learn that you misrepresented it (absolutely or relatively) presents its own issues, particularly if your information customer is me – someone who likes long data series with as much consistency as you can muster.

The scale of revisions we are told was partly down to a number of technical things, such as re-referencing the indices to 2011=100 to align with the National Accounts outputs and seasonal adjustment methods in the new processing system, plus the usual adjustments made to incorporate late data.

If you imagine all the elements that feed into or are related to the National Accounts as a huge multidimensional jigsaw that has to be, as far as possible, internally consistent, revisions are inevitable. When one bit moves others have to move.

Annoying as they are, I’ve learned to accept the regular revisions. Oddly, the upside is that in some odd way they seem to give me a better understanding of the strengths and weaknesses of the series.

To my mind, ultimately, all construction data are iffy. It’s just a question of how iffy and why.

Construction is a highly complicated industry to capture with simple measures. The projects are lumpy and extremely heterogeneous. The sectors are variable and hazy. The firms are all different shapes, sizes with very variable mixes of work.

Finding a neat way to capture all that in a few simple indicators presents the surveyor and statistician with a nasty task. Trying to get an accurate gauge on the precise level at any one time is even more devilish.

That’s what the ONS seeks to do with the construction output figures. For me, at least, it is less a short-term measure of direction of change than a useful gauge of level over time.

My approach on short-term trends tends to be to use what might be described as triangulation. I look at many surveys (including the ONS construction output and orders), assess as best I can how they match and how they conflict. I question their individual weaknesses and I try to assess how they fit with the broader context.

The Guardian used to run ads suggesting that it, as a newspaper, looked beyond the meaning one might ascribe to one observation and took in the bigger picture before seeking to interpret what was actually happening.

The first clip might show a dodgy looking fellow pushing an old lady. Your immediate thought was “mugger”. The second clip (the reveal) would then show the “thug” bravely pushing the vulnerable lady away from falling bricks. Ah, not a thug, but a hero.

Context is all, beware cognitive bias, etc, etc.

As with people’s intentions, we can read data and get the meaning completely upside down.

A lesson I learned long ago was to question all data. When seeking meaning from data it’s worth bearing in mind among other things, how they were collected, the assumptions in the methodology, the survey size, the motives of the respondents, how the survey data is translated into an estimate of volume or change, the impact and treatment of occasional factors, weights and price or seasonal adjustments.

You then have to look out of the window, away from the spreadsheet at the real world.

With these thoughts in mind let’s question the construction survey produced by Mr Williamson’s firm, Markit.

To provide comparison and a bit of context I have compared the Markit/CIPS construction survey headline indicator with the monthly construction survey provided by the Bank of England Agents.

Output Oct 2014 2What we notice is that since March 2010 the construction industry has grown on the Markit measure in 47 out of 55 months. However, when there has been a slowdown recorded it has been relatively slight. The Bank of England Agents however did not measure growth until November 2010. They then recorded a slump from October 2011 through to June 2013 (21 months).

If we take the period March 2010 to March 2013 the average Markit/CIPS score is 52.6 (suggestive of sound growth) against the average for the Bank of England Agents of -0.6 (suggestive of modest decline).

I will leave those in the industry to decide which they feel provides the more representative depiction of their interpretation of the path of GB construction.

I will however draw from an unrelated dataset, employment. Between March 2010 and March 2013 100,000 jobs were lost to the industry, that’s almost 5%. Now that could happen with an expanding industry. But it would be unusual for construction, particularly as the more labour-intensive repair and maintenance work seems to have been stronger than the less labour-intensive new-build work over the period.

I’ll not go into the potential methodological issues with Markit’s measure in any detail. I can’t. I’ve asked in the past for a full rundown of the methodology. I don’t recall receiving it.

I have a couple of outside observations though, I’d need to be convinced that procurement directors are necessarily the best placed to gauge business activity within construction (some may well be) and I would instinctively be wary over the PMI sample size given the heterogeneity and the muddled regional spread of construction firms.

Interestingly, I have found the ONS transparent and open to and accepting of criticism over its construction data. The statisticians and their approaches come in for regular scrutiny at the Consultative Committee on Construction Industry Statistics, not least from me. I can see it hurts them at a personal level. But that is the price we pay when we accept our mistakes as we try to get things right.

That brings me to glasshouses. Ideally they are great for transparency. Not so good a place in which to throw stones.

Construction recovery stalls, but the forecasts remain bright

Brian Green

The latest official output data from the Office for National Statistics show growth apparently stalling in the second quarter.

This may seem at odds with trade surveys and media commentary which tend to point to construction booming. It’s not really.

Despite the zero growth recorded by ONS for output in the second quarter of this year, at the risk of doing a Michael Fish, I think we can be confident that the industry is pretty much set on an upward path. There’s nothing startling on examining the data that would suggest otherwise.

Though I’m not sure I’d call it a boom, more a rebound – finally.

You’d hope so. The gap between output at peak and today is still 10%. Forecasters expect the industry may just about have recovered the lost ground by 2016.

Construction output 2014 q2The latest ONS data release does, usefully in my view, provide a reality check. The release reminds us that recoveries can be bumpy and uneven affairs. Indeed, the data release prompted me to make this point by cheekily tweeting that if it were not for housing-related work construction would be in recession.

But even non-domestic construction is, I think, actually on the mend. It tends to take a bit more time to recover. The data supports optimism that the recovery is starting to spread into corners so far left untouched. But while work in the pipeline is pumping up, at this stage recovery in work on the ground will remain patchy.

So suggestions that things are hunky dory in construction will inevitably jar with many folk who are still struggling.

The ONS figures overall put output in the second quarter up 4.5 % on a year ago. That’s sound growth. But this is down to some sectors in some regions recovering far quicker than others. This is best characterised by the strong housing growth supporting boom-time growth rates in London.

Housing and non-housing output 2014 q2London, incidentally, is where most national policy makers and opinion formers reside. It’s understandable that their view of the national picture is shaped by what they see around them. Many will not be able to look beyond the effects of housing output being double its 2007 level in London to appreciate the effects in other regions of housing output being 30% to 40% down on 2007 while public sector is shrinking and private commercial and industrial building activity is still fairly fragile.

As to the reasons for this recovery in construction, there’s little magical, unexpected or extraordinary. By and large when there’s sustained growth in gross domestic product there tends to be growth in construction. This holds true in the UK as it does in Argentina, Botswana and China.

After a long period flatlining the UK economy has woken up and enjoyed a year and a half or so of sustained and fairly robust growth. Forecasts suggest this period of growth will remain strong for some time yet. So there is a platform that supports growth in construction.

The latest set of industry forecasts support this. Two, Experian and Construction Products Association, expect strong growth from here, expanding the industry by about 10% over two years. Growth will be particularly strong for new work. The Hewes forecast shows growth, but it is weaker and expected to evaporate in 2016.

The Hewes forecast tends to factor in more of the downside risks rather than taking a strictly central position. One of the growing risks noted by Hewes is the rising cost of construction. This, Hewes argues, will restrain the construction growth of output in volume terms – the normal measure used.

Hewes is also pessimistic on a return to growth for the commercial sector. It forecasts persistent falls for a couple of years, compared with annual rises of about 4% to 5% forecast by Experian and Construction Products Association.

But even the more pessimistic take on risk from Hewes shows the industry improving.

Forecasts summer 2014There are upside risks to these forecasts. If they are realised and release greater confidence to build, they might easily out gun those on the downside. There’s huge potential demand for construction if the confidence and finance can be found. The slump in building work will in some quarters have created a backlog of work that needs addressing. The need to address the nation’s energy supply being a major issue. Furthermore the population continues to grow adding pressure for more homes and infrastructure increases.

There are also structural changes in the economy relating to the increased use of information technology. This is changing how we use buildings and where they need to be located. The changes should result in demand for construction as the built environment is adapted to suit.

Naturally the General Election in 2015 represents a real risk. But by comparison to 2010 the risks may be stacked on the upside.

The last election was fought on the battleground of austerity. That is not good for capital spending. This time around it seems that all political parties are increasingly emphasising the benefits of investment in housing and the nation’s transport infrastructure. In the bidding war for voters there is a fair chance this may push spending on construction up rather than down the agenda.

Downside risks remain. When and how fast will interest rates rise and how will rises impact on investment and consumer spending? What might unwinding quantitative easing mean for investment? The current recovery is reliant on consumer spending, despite low earnings growth, how long before we see a more balance recovery? Will the Eurozone troubles remain contained? Will fear over capacity constraints restrain investment in construction? How will global political instability impact on economic growth? What effect might independence for Scotland have on construction? And there are plenty more.

There will always be risks, but in the round construction is in a much stronger position than it has been for some time. Work is easier to find and will become so for ever more firms in the industry. And there are plenty of reasons for optimism in the longer term.

That, however, doesn’t mean everyone is seeing improvements and everyone will. More importantly, while work may be easier to find, the industry has a tough job on its hands rebuilding its own infrastructure, particularly its skills based, as it drags itself out of the slough of long and painful depression.

Are we witnessing the start of another housing problem?

Brian Green

There’s something, no lots of things, desperately disturbing about today’s stories (examples here and here) telling of Government panic over potentially unflattering house-building figures released just before the General Election.

Where to start?

Let’s start with “starts”. These seem to be the housing figures in question.

On 20 February I tweeted: “For those not familiar with the terminology: you live in a housing completion, you don’t live in a housing start”

It was a jibe in response to a press release on the latest house building figures. They showed housing starts in England up 23% in 2013 on 2012. They also showed completions down 5% 2013 on 2012.

Mr Eric Pickles and his advisers chose to crow on the starts figure to gain immediate impact with the headline: “Housebuilding at highest for 6 years.”

Really?

To understand the starts figures you need to consider stock and flow and restocking effects in the house building world. You also need to consider what’s been happening on the ground in planning. (I did a blog with some charts that in part covers this point here.)

A better measure of how well house building has been doing in these official figures is the number of homes completed. I’ll not hang around explaining why even these are no perfect measure of success in terms of solving the housing problem.

I will however say that housing starts data are useful forward indicators for what might be built. So are planning approvals, net reservations, mortgage transactions and a host of other data. But they are not an accurate predictor of what will be built and when. And they are probably worse than some of the other indicators mentioned.

Starts figures are also very volatile. Naturally they swung up rapidly from a very low base. This produced impressive sounding percentage gains, the type politicians can’t help seizing upon.

Why did we see such a sharp upswing? Firstly because house builders needed to restock their much depleted production pipelines, which (collectively) had been run down during the recession. Secondly, because new land was coming through, after a few years of a slowing in applications and approvals, there were more sites to be opened, more starts to be made. Thirdly, because the production levels had to be readjusted upward to meet current demand the rate of starts had to rise. And there are other more subtle reasons for the rapid rise in starts.

Any smart fellow would realise that this probably would lead to an initial surge and then things would settle down, if not fall off slightly, but remain at a higher level.

The completion figures however relate to sales. Looking forward these will rise, but more slowly and more steadily than starts as the industry emerges from recession and transactions pick up.

The eagerness of the Government to claim credit over its opposition for “fixing” the housing market had them pick starts over the less impressive completions figures.

Now it seems they have twigged to the possibility that they will be hoist by their own petard, as the volatile starts figures might just dip at an inconvenient time. Poetic don’t you think?

This reveals four things, if not more:

  • The shallowness of politics and its concerns with how it looks rather than what it does;
  • The vanity among certain politicians, matched only by their delusion over the effectiveness of their actions;
  • The abuse to which politicians will put otherwise useful statistics;
  • The apparent crass stupidity over the workings of the housing market at the heart of the department notionally charged with solving its problems.

I’ll stop before I just repeat myself, but less politely.

There is of course another disturbing aspect to all this if the media reports are correct. The fear within the Government that it might look silly now appears to be driving housing policy.

To be quite honest, I’m a bit surprised by this. I’d naturally expected a simpler solution to this obvious potential trap, a switch within the department to ditch the starts data as the prime measure to highlight progress in house building and place the emphasis on completions. Obviously the growth rate would be much poorer and the level appalling relative to the past, but the likelihood is that it will at least be heading in the right direction as we enter full-scale election fever.

However disingenuous that might be it is preferable to tailoring a policy that impacts on the lives of thousands of people and is central to the economy to meet some spurious Government PR target.

But what do I know about politics?

Is the deep-seated problem of housing supply really just about planning?

Brian Green

Does constraint on planning approvals restrict the supply of homes or does the demand for homes determine the level of planning approvals? Perhaps both work in tandem or parallel.

These questions have bugged me for years.

Here’s some fresh thought prompted by the release of the latest house-building figures and, in part, by concerns expressed over the weekend by Bank of England Governor Mark Carney about “a housing market that has deep, deep structural problems”.

The housing market is a complex system shaped by numerous factors often acting paradoxically. Planning laws shape the housing landscape. That’s the aim. But is planning really the overriding reason we don’t build enough homes in England and why they are so poorly distributed?

Planning’s central role in the housing debate is seldom challenged, though more so recently. It dominates the narrative in housing policy in England, which says restrictive legislation is why we build too few homes.

Policy makers recognise other factors, such as tight lending and the hefty deposits, choke demand and slow private house building. Hence Help to Buy and other variations on a demand-enhancing theme. But these are short-term measures to fix short-term market failures.

The collective brain of policy makers, supported by many academics and commentators, believes: “Fix planning and we fix the dysfunctional English housing market”.

What if planning isn’t the main problem?

If childhood taught me one thing it was the need to ask everyday whether the Emperor is wearing clothes. So let’s ask: is planning the root cause of England’s housing market ills?

Certainly I’m impressed by research showing the potency of planning restraint in shaping the English market. I’m convinced that planning is a factor in the mix.

I’m less convinced by a slavish acceptance that because it frustrates business it must be the problem.

Of course it restricts business. That’s its purpose. The alternative, no planning restrictions, would destroy economic and social value.

Anyway, here are a few charts drawing on the latest housing starts and completions figures and some statistics on planning and residential property transactions.

Some of what I’ll illustrate readers of brickonomics will have seen before, possibly a few times and I’ll warn now they pose more questions than they answer.

Planning q1 2014 1My favourite graph, one I’ve pumped out for years in the vain hope someone will explain it’s true meaning. It illustrates one of the closest relationships in the housing market. Sadly it’s one of the least studied close relationships I know.

Private housing starts and completions track property transactions remarkably. Crudely interpreted it suggests that across England as a whole since the late 1970s for every 10 homes sold one is a new build.

Nationally, house builders take a consistent share of the overall home sales and have done for years. The data also suggest house builders respond to changes in the level of transactions, rather than the other way around.

Fascinating, but so what? Well it poses a number of questions.

Firstly what happened in the late 1970s and early 1980s to cement this relationship?

Secondly, what drives this relationship? Coincidence seems far-fetched.

Thirdly, if house builders always build a 10% share of the homes sold, how does planning fit into all of this? How might a planning decision in Rotherham that leads to a development of 100 homes prompt 1,000 households in England to buy homes?

OK, that’s silly, but where’s the causal link here?

More importantly it suggests  that if we want to boost private-sector house building all we need to do is boost transactions, encourage more homeowners to move house more often. (Note with fewer homeowners and the problem gets worse.)

Planning q1 2014 2The second graph zooms in, using four quarter moving totals. It shows the lead up to the crash, the recession and the recovery.

We see wobbles in transactions in the 2003 to 2005 period with lesser wobbles in starts. Then, when transactions fall in 2007, starts plunge shortly after. No shock there. The best fit correlation suggests starts lag transactions by about 6 months.

Interestingly coming out of the recession starts seem to run ahead of transactions, although the number of home completions continues to lag. This seems to suggest again that house builders respond to market demand in a way that maintains the 10% market share.

This market share fluctuates and is also not even across England. Even so, for more than 30 years the relationship has held remarkably close to one in ten.

Let’s look at planning approvals. DCLG data are pretty dirty. The department doesn’t provide good statistical time series for planning. I’ve put the third graph together using quarterly individual releases. (I’ve produced a similar time series using Barbour ABI planning applications data, the key point is probably better made with that.) But for this blog I chose to use official data sources that can be easily accessed and checked.

Planning q1 2014 3The immediate question that springs from the graph is: if access to land with permissions was the big problem in the mid 2000s, why did house builders’ appetite seem to wane in 2005? Why did they put in fewer applications?

The pressure to boost house building was at a high, especially following the Barker report. Why was the tap turned down on the pipeline filling the stock of land with planning? Planning approvals fell from mid 2005, before plunging in late 2007.

Were developers responding to falls or a fear of fall in demand even in 2005? Certainly transactions dipped and so did house-builders’ reservations. Were developers spooked? If so we see again planning following demand, rather than supply following planning.

But then again, the mid 2000s was a period of extraordinary corporate activity in the sector, with major mergers and acquisitions, whereby individual house builders expanded landbanks through acquisition. Did this deflect them from seeking planning permissions? Were developers, at a corporate level, so frustrated with planning restrictiveness they chose to buy “oven-ready” land rather than battle planning authorities?

If we look at the period 2008 to 2012 what do we see? A significantly lower level of planning approvals than previously. Is this related to effective housing demand or planning restrictiveness? The former, surely?

Moving forward to the near present, we see a surge in approvals, albeit from a low base. What lies behind this?

It can be read in a number of ways. The Government would like us to read the data as saying the rise is down to its fundamental shakeup in the planning regime. It may be.

There’s of course an alternative reading. House builders seeking to increase their land supply in anticipation of a rise in future sales. The data clearly show rising planning approvals running ahead of transactions.
It’s unlikely that a rise in planning approvals prompted a spurt in householders moving. So we must assume we are seeing growing house-builder confidence and anticipation of a rising market.

There’s another explanation. The NPPF (National Planning Policy Framework) created an opportunity for developers to more easily win planning permissions through appeal against local authorities without an agreed Local Plan with a five-year land supply. Are they simply taking advantage of this once-in-a-planning-regime-change opportunity?

Planning q1 2014 4What we see in the fourth graph is how, recently, starts have increased after a rise in planning approvals. This suggests that house builders may well have been held back recently from expanding their operations faster for want of permissioned land. Note that the data show that the level of completions has been much slower to respond. But this does seem to support house-builders’ case (but not prove), that they are not gratuitously landbanking, as is the accusation in some quarters.

We also need to consider the restocking effect. Not only are house builder having to increase land supply to accommodate a rising replacement rate, they also have to increase the land within the production pipeline. Periods of rapid expansion can cause surges earlier in the production process that are not seen in the later stages.

Pinning down the cause of the rise in planning approvals is not easy given the timing. What’s down to the new planning regime? What’s down to increased demand?

What we can know is that the level of planning approvals as of the end of last year was still way down on the pre-recession level, even the best part of two years after the introduction of NPPF.

It is tempting to see the blue line in the fourth graph as suggesting that the NPPF has made the planning system more amenable to developers and led to this rise in approvals. Developers might, and do, say so.

The data, however, are far less clear. Worse still, the measures are awkward and very open to misinterpretation, given the complexity of timings and outcomes in planning decision making.

Planning q1 2014 5Let’s have a look anyway. The fifth graph plots planning approvals (four-quarter moving total) against the proportions of decisions made within 13 weeks and the proportion of those decided that are approved (four-quarter moving average).

Certainly on this showing things seem more free-flowing than in the past. The proportion of positive decisions has risen. But, of note, this rise came as the number of applications fell.

Again, there are a number of possible explanations. Maybe house builders pulled away from more controversial schemes. Maybe fewer applications reduced the political pressure on planning authorities to reject applications. Perhaps house builders improved their consultative skills with both the planning authorities and their communities.

What is clear, given the relatively high proportion of approvals is broadly the same as it was before NPPF, is that we have little evidence on this measure of a more permissive planning environment.

The intriguing correlation is that between the increase in approvals and the increase in approvals taking less than 13 weeks. Is this a reflection of a more effective planning regime? Or are house builders working harder to push through planning applications?

Taking all of these time series together the weight of evidence seems to point to the causal links running from market demand to planning approvals and then, inevitably, to the supply of new homes. The more demand in the market, the more house builders seek planning permissions, the more they build.

This, at face value, seems to dilute the strength of the widely-held view that the supply of new homes is limited by the planning system.

It suggests that to improve the supply of new homes we need to increase demand for new homes. This in turn seems to suggest (given the ratio of one new home sold for every 10 homes bought) the need to get more homeowners moving more often.

If we can’t? Well, that would point to a market failure and the need for state intervention.

Those who believe fervently planning is the central problem would argue that the balance of demand for new homes over existing homes would shift if developers were freer to build where demand is greatest. Perhaps, maybe house builders might increase to a ratio of two new homes sold for every ten house sales.

But as we keep saying the housing market is a complex system, with weirdly unpredictable interactions, reactions and feedback loops.

So, for instance, we should accept that a restrictive planning regime would almost inevitably create a context over time within which house-building firms operate in a particular fashion. Restrictive planning would also create a market over time within which home buyers behave in a particular fashion.

What’s more we’ve ignored other obvious critical actors, such land owners. How do planning restrictiveness, market demand, the level, quality, desirability and availability of existing stock and developer behaviour influence the land price, land-owners expectations and their willingness to sell at a price that ensures sufficient supply? It could be argued strongly that the real competition in house building, as our system currently operates, takes place in the land market.

Even stripped down to the few variables we considered above, its very tricky to establish what weight to ascribe to planning restrictiveness and what weight to ascribe to house-builders’ operational behaviour or demand (effective or potential) from home buyers.

One thing I am convinced of: policy makers need to broaden their curiosity and extend their debate on the housing market and house building. Obsessing about and demonising dysfunctional planning systems, faceless bureaucratic planners, “landbanking” house builders and the archetypal nimby may well be popular, but it’s high time we put more effort into exploring the problems more widely.

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.

Cracks are already appearing in the Government strategy on the building materials trade gap

Brian Green

The construction industry imports about 10% of its output value in building materials and seems to have done all my adult life at least.

Admittedly the figures are a bit ropey, but the pattern looks pretty clear from the top graph.

Building materials imports and exportsThis is important, because the Government’s rather suspect industrial strategy (pdf) for construction has as one of its big targets a 50% cut in the building materials trade gap by 2025.

Looking at the current data I reckon that means, according to my quick calculations anyway, exports would have to expand at about 4% a year just to hit that target if imports remain where they are now.

If imports continue to grow with construction output – as they have over the past four decades – and construction grows at, say, a modest 2% a year, then exports will have to grow at about 6% a year.

Building materials imports and exports deflatedThat’s a big ask. The second graph, which I have adjusted to take some account of inflation, illustrates just how poorly exports have performed over the past two decades.

I raise this issue of imports and exports because that big ask is likely in the short term to get a whole lot bigger.

The rapid increase in house building has generated a shock in the demand for bricks and blocks.

A number of factors were at play here in addition to simply the extra bricks and blocks needed to build more homes:

  • Production had been lowered and stock levels reduced leading up to the surge in demand as house building activity had been waning in mid to late 2012
  • There was an unscheduled shutdown at one of the aerated block plants taking out supply
  • Builders needed to expand their production pipelines, this added to demand
  • There was a bit of panic buying

Housing starts completions outputIn fact if we look at the recorded level of housing activity the upturn doesn’t so far seem that spectacular. And sales of both bricks and blocks didn’t spike that crazily, even though firms were recording best-ever quarters in the early part of 2013. Had they been prepared they would probably have been able to pumped up their stocks in the winter to have accommodated most of the upswing.

production of aerated blocks

What threw me looking through the data was how since August deliveries of aerated concrete blocks actually fell, while brick deliveries increased. This paradox was explained to me thus.

The sharp rise in demand up to August was met in part from stocks which eventually ran down. This meant firms having to limit supplies on a priority basis as they turned up production and rebuilt stocks. The net result was a fall from the stock supported level of deliveries, despite a rise in production.

production of facing bricks

But what is clear, builders looked to imports to make up for shortfalls. The graph shows how imports of bricks and blocks jumped in 2013. Most of that jump was down to a surge in the second half of the year. In the final quarter imports were more than double the level in the same period a year earlier.

Concerns over materials supply, especially the supply of bricks and blocks, have not eased. Indeed, the latest Home Builders Federation survey on production constraints shows concerns over materials availability accelerating at the end of last year.

Deliveries bricks and blocksLooking to the future, the hard question to answer now is whether the reliance on imports will become normalised. Price and choice will play their parts here, but if imports become a more permanent feature of the brick and block industry it may well lower the incentive of manufacturers to invest in the UK.

And don’t forget decisions to invest here are not just based on demand. For instance, for manufactures of these products energy costs and certainty of supply are determining factors. There are big questions over the UK’s energy policy.

Imports bricks and blocksFor me, however, the more telling curve is the one that shows exports of concrete blocks falling below those of imports.

In microcosm we see here the scale of the challenge set by the construction industrial strategy in trying to cut the building materials trade gap by 50%. It may prove tough over the next few years just to hold the trade gap steady.

 

 

Postscript

What would’ve been handy is if the Government had not allowed the industry to shrink to the level it did.

Imagine if as a nation five years ago we had directly funded 200,000 homes. We could flog them off now and not just pocket the uplift in value, but also we’d have saved a fortune on benefits, gained on taxes and kept an industry and its skills readied for when it would be needed. Like now.

On my crude count back in 2008 that would have earned or saved us as a nation a total of more than £10 billion. And guess what, we’d have 200,000 more homes.

Am I bitter? Perhaps we all should be.

How less work led to more growth – lessons in statistics from the latest construction data

Brian Green

Here’s a prime example of why it’s important to use a range of measures and timeframes rather than one single stat when using statistics as a tool to examine or describe whatever you’re interested in.

The headline figures from the latest construction statistics say that construction grew in the final quarter of 2013 by 0.2%. This compares with the earlier estimated 0.3% fall released when the first estimate of GDP was published late last month.

Looking simply at this changed figure the immediate interpretation is “Brilliant the industry is doing better than we thought!!!”

Well actually, here’s the thing. It isn’t.

It was less work than expected that made construction grow more than expected in the final quarter.

Trust me this isn’t some conjuring trick and it’s not too hard to follow.

Using the data from the GDP figures last month I produced a graph (the top one of the two below, the second uses the latest construction output data from the ONS) making an estimate for the missing December figure for construction output. I estimated £9,577 million (using data from Table 2a: Chained volume measure of construction output in Great Britain: 2010 prices, seasonally adjusted).

Construction outputWith the graph to illustrate my case, I wrote a blog saying construction was still growing despite the estimated fall in the final quarter. My first point was that the figures would be revised and I provided a soft hint that it would likely be up – although making plain that it could have been down.

I’m not a clairvoyant. Revisions happen all the time and you can get a hint of how things might change. Though sometimes (well quite often really) you’ll be wrong.

What’s fascinating (and it amused me) is that the newly published table 2a shows a figure of £9,576 million for December. If I’d put a spread bet on my initial guesstimate of £9,577 million what would I be raking in now?

The point is that with the same figure for December we have ended up with two different stories: one of decline taking the data at the time of the GDP estimate; one of growth from the latest construction output data.

The irony here, as I said earlier, is that the upward revision for 2013 Q4 from a fall to growth comes as a result of less work having been done than we thought (about £550 million) in earlier months.

So we get what may seem paradoxical, less actual work than previously estimated leading to the headline number of stronger growth in the final quarter.

This is why we need to look beyond the simple headline measure and take a longer view of the statistics when interpreting the numbers.

Look at the two graphs. How much real difference is there? Little. But the narratives that might be created from making poor selections from the data that feed these two graphs could be radically different – one saying growth the other saying decline.

This would not be the fault of the statistics. It would simply be poor narration.

Don’t panic over construction output drop. The industry remains on a growth path

Brian Green

Don’t panic. Construction is still growing. The first estimate of gross domestic product may show that quarter on quarter construction output was down 0.3%. But there’s no reason to suggest underlying growth has stalled.

Getting obsessed with a single quarter’s figures, let alone a single month’s figures in construction is a bit… well… obsessive.

Construction for GDP story

The graph shows clearly how erratic monthly data are and how, even averaged over three months, the figures still bounce quite a bit. Looking at this chart you’d have to be a real pessimist to see construction activity flagging.

Here are four points that I think should be noted in relation to the latest construction estimates in the GDP data.

The first point is that the data are very preliminary and will be revised. They could well go up and you may well find that the fourth quarter was flat rather than down. Then again they may be revised down.

The second point is that the construction industry is very hard to measure. Things like seasonal adjustment and inflation are extremely hard to get right so they can cause distortions from reality. Furthermore there are uneven lags in the data caused by the difficulty of collecting consistent responses from businesses, so the monthly data are in effect in blurred vision.

The third point to note is that construction is a pretty lumpy business and big swings are not unusual.

But there is, at the moment, a fourth point I think is very important to bear in mind – restocking. That is to say the amount of output needed to lift the amount of work in progress, within the production pipeline, to a level that better matches the expected level of future demand.

This is going to have quite a big impact on private housing at the moment given the sharp rise in expected sales. The impact will be even greater if the stock of homes for sale had fallen sharply just as demand from Help to Buy kicked in. Not only will firms have had to be doing more work to finish more homes to sell, but in the early stages they will have been doing more work to increasing the amount of infrastructure and part-built homes in the pipeline.

Sure enough the figures provide some support for this notion. You see an impressive near-10% rise in private housing output between the first and second quarter of last year, before a more subdued rise in the third quarter, with activity flattening out a bit by August.

This surge of activity is consistent with house builders suddenly opening more sites and starting many more homes to meet the pace of future demand.

There was a similar jump pattern in the commercial sector between the second and third quarter when output jumped by almost 7%, with growth calming a bit in the autumn.

Now restocking the production pipeline will not be the only thing at work here. It may not be that much of a factor. But it could be. A step change in production levels can cause a big surge in work on the ground, so it should not be surprising that we saw such a surge and then a subsequent easing in growth.

Taking all the above points in to account it seems pretty clear to me that we have to look beyond monthly and even quarterly figures to appreciate the underlying growth pattern of construction at the moment.

For what it’s worth, my take is that the industry hasn’t stalled it probably just expended a lot of effort earlier on in the year building a platform for growth in the future, so bulking up the second and third quarter output. I suspect there is reasonable underlying growth and most other indicators would seem to support this view.

Just how sustainable and strong this underlying growth will prove in the longer term is another question. There are plenty of problems ahead yet and awkward issues that I suspect will remain unresolved until after the General Election.

But I’d be surprised if for the next year or so the industry, as measured by ONS, didn’t show pretty reasonable growth, even if it the rate of growth does bounce about a bit.

 

 
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