House construction activity at a near 10-year high

house-building

There’s a rosy hue around the construction industry, following recent reports that it is no longer one of the weakest links in the economy and is enjoying significant growth at last.

According to the number-crunchers, the Markit/CIPS Construction PMI for October rose to 59.4, up from 58.9 in September. In short, this means growth, and the highest recorded increase in the past six years. In addition, managers reported they were taking on workers at the fastest pace for the same period, with most feeling confident that output and client spending will continue to rise in the year ahead.

Their optimism is bolstered by the fact UK unemployment has fallen to 7.6%, a three-year low that is being seen as an indication the economy as a whole is continuing to heal. Nevertheless, the hard work for construction companies is arguably just beginning.

 

What is driving construction growth?

While civil engineering and commercial activity saw strong rates of expansion, it is house-building that is taking credit for the boost, expanding at a near 10-year high in September to a PMI of 64.8, well up on the 61.1 seen in August.

Indeed, the latest national statistics on house-building show that annual housing stats numbered 110,530 in the 12 months to June 2013, up by 7% on the previous year.

This chimes with the RICS Construction Market Survey, which records that in the third quarter of the year, some 41% more chartered surveyors reported rises in privately funded housing projects compared with the previous period. It’s also the first time all regions in the UK have reported growth since the economy crashed in 2008.

The Bank of England’s Funding for Lending scheme, which helped stimulate mortgages, is partly credited. But unsurprisingly the Government is claiming this as a victory for its fledgling Help to Buy initiative, which supports first-time buyers in getting a mortgage for new or existing housing. The evidence bears this out. For instance, house-builder Bellway PLC reported last month that its annual profit rose 37% and attributed it to the initiative, claiming demand “remains strong in most areas of the country”.

Detractors, however, argue that the Help to Buy initiative will cause a housing bubble that could ultimately be self-defeating. The RICS said almost three-fifths (57%) of surveyors reported price rises during last month, the highest since June 2002.

 

Is house-building leading economic recovery?

Construction accounts for 6.3% of national output, behind the manufacturing and services industries, which are also seeing improvement.

Nevertheless, Bank of England governor Mark Carney has said that although the pick-up in housing activity needs to be put in perspective – as activity levels are still running at between two-thirds or three-quarters of historic averages – he believes it is “initially an important part of the recovery”.

 

Maintain perspective

Without doubt, the figures are cause for some celebration, not least because construction was hit particularly hard after the 2008 recession, with many building projects put on ice or scuppered. However, there are still challenges ahead for the sector.

Employment is one area that will need attention. The RICS survey reflects the optimism of the Markit report, with an increase of 49% of respondents expecting more construction jobs to be created. However, with output expected to pick up speed by nearly 4% over the next 12 months, there are fears that skills shortages will hamper growth.

Construction training organisation the CITB reports that there is a notable skills gap among specialist contractors, with 21% of respondents finding it more difficult to recruit skilled labour this quarter. This has meant 13% of specialist contractors have been unable to bid for work.

Observers are concerned that although there is demand, the industry is being held back by lack of resources and skilled workers. Analysts also estimate that 100,000-150,000 construction workers are either out of work or now employed in other sectors.

RICS chief economist Simon Rubinsohn commented: “It is particularly concerning that we are already receiving reports of some skills shortages as well as capacity constraints for some building materials, such as bricks.”

It might also be churlish to point out that output across construction is still 14% below its peak, according to the Office of National Statistics.

So, full recovery will be a job in itself. The construction industry has been suffering for six long years and will, among other things, require investment in equipment and in training employees. But it is on the right trajectory.

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