Why construction should be a jewel in the crown, not a diamond in the rough

The Queen’s Speech sets out the coalition government’s agenda for the coming session of parliament, yet we are looking at more piecemeal policies offering little real support for the sector – we await the Industrial Strategy on Construction with interest and have already fed our views in, but the lack of urgency and really attacking the challenge is frustrating.

With construction so important for housing, growth, and manufacturing industries such as joinery, it should be the jewel in the crown of a UK recovery. So why does it remain a diamond in the rough? And where should government start?

Build more houses and cut the VAT

Time and time again we hear construction is a growth enabler and vital to recovery, but since The Plan For Growth was published in 2011, we have seen decline across the piece.  The expression ‘fine words butter no parsnips’ (a favourite of my Grandad) comes to mind.  We cannot afford to wait for change, we must stop tinkering and make it happen.

How can we recreate the construction driven recovery of the 1930’s?

The disturbing facts

The Department for Communities and Local Government (DCLG) reported in April that the number of new households created in England between 2011 and 2021 is estimated to be 221,000 per year.

Total housing starts in England were 99,010 in 2012, 55% lower than required and, 8% lower than the previous year.  Public housing starts fell 19.0% during 2012, this despite the fact that we have over 5 million people on waiting lists for a social home and this is expected to worsen as rent increases and the number of repossessions grows.

In 2012 we started 22,712 public sector housing, the lowest level in the past 9 years and down 19% on 2011 levels, which was already down on the year before.  For every £100 invested by the current government in housing £95 is spent on housing benefits and a paultry £5 on bricks and mortar – 30 years ago this was 80:20 in favour of actual investment in housing!

This seems to defy all logic.

Construction is a growth enabler, building houses is good for the economy, society needs new houses yet …..we are building less!  Admittedly we are looking at growth in 2013, but the overall 8.0% estimated in private sector starts in 2013 barely offsets the declines of 2012 – here we are limping rather than charging towards the target and most disturbingly we are expecting further declines in public sector investment.

In the last Budget support was largely through financial underwriting.  This helps the banks to lend, but money is always filtered as it moves? Whilst flexible finance is critical to create the pull through, it will not yield the step change impact needed on new stock and certainly not in the timeframe we need.  Furthermore whilst this policy is de-risking the banks, it is having the opposite effect on the Exchequer. 

Since the autumn statement, things have at a macro level teetered along the bottom –initiatives to inject funding (as we and many others predicted) are taking time to filter through and not necessarily hitting the right targets.  The little growth we are seeing is partially pent up demand from bad weather and it is flattering the facts.

As well as lost stimulus and opportunity we have seen the loss of 280,000 construction jobs since the start of the recession and the closing or mothballing of significant levels of building materials and manufacturing capacity.  In our own sector, since 2010, 8% of joinery firms in the UK have closed.  We have seen leading names fall by the wayside and profits and turnover decimated.   Margins have been squeezed and many joinery business owners have been putting capital into their own business (unable to source affordable funding through the banks) just to keep going.

So how do we create the stimulus required?

Building houses provides stimulus, every £1 invested in construction yields £2.84 of growth.  Building creates jobs, reducing drain on benefits and increasing positivity, but it doesn’t end there.  Not reflected in the £2.84 is that fact that 30,000 homes is likely to mean c30,000 sofa’s, c30,000 washing machines, 30,000 toasters, c72,000 televisions, c60,000 beds, c30,000 telephone lines and internet contracts and 30,000 new council tax payers.    This is a real catalyst for growth!

Real demand stimulus requires opening our eyes to the facts and taking decisive action – we need to look at where and how we invest in housing as a nation.    

The Private Sector

The Government remains blindly convinced that the private sector will come through, but right now would it suit the major house builders to release their land banks?  New build house prices have risen 3 per cent faster than other property in five years (according to a Halifax study).   The typical new build home price across England and Wales rose 12 per cent since 2007 to £233,822, compared to 9 per cent for the rest of the market.  Nobody wants free fall house prices, but an artificial bubble is equally as concerning – house prices must be sustainable and proportionate for the economic and socio-economic benefit of all.

Planning is a challenge and there is understandable resistance to building on the Green Belt – assuredly pragmatism and sensitivity is needed, but the fact is that this should not inhibit growth.  There is land that can be used and is ready for use.  In Sept 2012, the LGA reported that House builders were sitting on 400,000 undeveloped plots of land with planning permission.  Beyond the land banks in the hands of the House Builders, major retail chains are also sat on land that our economy needs.  These businesses often get permission and wait for the value of the site to rise, every five years, renewing the permission, but keeping the site empty.

Developers who bank land in this way should be penalised for doing so.  We also need Local Authority Planning to show creative leadership, combining the need for stimulus with the recommendations of the Portas Review to revive town centres, to rebuild communities.  We have seen some political weight behind repurposing commercial holdings, but what about retail?  What is the impact on the shopper walking past so many shuttered up shops?  Retail vacancy rates having doubled in the two years to 2012, it is unlikely that this will all return, so why not look to consolidate the town centre, recognising that internet shopping will reduce the requirement for retail units long term, use the fringe for new housing, and create new customers for a vibrant, albeit slightly reduced central commercial area?  If this is in part fuelled by pubic investment, the new sustainable rental income should offset any detriment to the local authority from perceived loss of business rates.  

Public Rented Housing

Following on from above, now is the time for the Public Sector to look at direct housing investment, the fact that government have just opened funding for lending to support buy-to-let endorses the investment (or the risk is great).  This does not have to be simply social housing in the traditional sense, indeed it could be an investment yielding attractive returns, Public Rented Housing.

Where does this investment money come from, if we look beyond Central Government Investment (although this is not beyond all possibility), Local Authorities have reserves.  Indeed, despite cuts to funding, English councils have increased their reserves by £4.5bn over the last five years to almost £13bn, according to figures released by the Audit Commission in December 2012.  Half of this would cover 30,000 new houses (roughly doubling current housing investment from the public sector) – the sustainable income this would provide is surely more sustainable that over-reliance on shops and parking.

If we look beyond the Local Authorities, 2.5% of quantitative easing had been diverted by Bank of England away from the balance sheet of the banks and invested directly in housing, this would have enabled 30,000 new houses per year.  This is asset could owned by the bank, turned into bonds and managed via the local authorities (again providing potential revenue) or Housing Associations.

We can and should build more public sector owned housing.

Cut the VAT

Cutting vat on construction will also help to drive local growth.  The arguments for 5% Vat on domestic RM&I work is recognised by most leading lobby groups as a growth catalyst and a way of bringing the vast majority of construction work out of the cash economy.  Construction is held back by the grey economy and all the shady practice that is facilitates – cutting the VAT and bringing all RM&I into the same 5% VAT arena as that for new build homes or that have for homes that have been vacant for two years will bring work forward and support the evolution of a modern and dynamic building industry.  Furthermore it will boost the Green Deal and the wider carbon agenda by speeding up much needed improvement in domestic energy and water efficiency and extricate the UK from European judicial review on VAT on Energy Saving Measures.  

The fear of short-term loss in VAT is causing politicians to withdraw from action, and there are fears, that when combined with the austerity dogma we are now following, such a move would look bad in the headlines. This is unfortunately another catch 22 we find ourselves in, how can you plan for the future amidst a 5 year scrabble for power underpinned by a press that is keen to alarm and escalate impact. Prudence? Yes. Sensible investment? Yes – but short-termism is the enemy of vision and ultimate success.

There is no growth without a strong construction industry, we remain a jewel in the crown or opportunity, but continue to be addressed as a diamond in the rough.

Iain McIlwee, BWF Chief Executive

 Useful Links:

Construction for Growth
www.construction4growth.co.uk/

Homes for Britain
https://homesforbritain.org.uk/

Get Britain Building
www.getbritainbuilding.co.uk/

Cut the VAT Campaign
www.fmb.org.uk/news/campaigns/cut-the-vat/

The Portas Review: An independent review into the future of our high streets
www.gov.uk/government/publications/the-portas-review-the-future-of-our-high-streets

UK Economy Plan For Growth
https://www.hm-treasury.gov.uk/ukecon_growth_index.htm

 IainIa