Analysing the direction over the longer term suggests some fundamental issues at play

Michael Dall

Seasoned observers of construction were again scratching their heads as the latest Office for National Statistics (ONS) figures showed that the industry had declined in August compared to July and the previous August. I do not normally pay too much attention to the monthly changes in output and in fact the reclassification of certain types of work in this latest release make such comparisons even more futile.

However, analysing the direction of travel within the industry over the longer term does suggest some more fundamental issues at play. While the downturns in construction in 2008/9 and 2012 were the result of a lack of demand there is increasing evidence that supply side constraints are having an impact on the level of output in the industry.

Even more worrying is that housebuilding levels are still significantly below what most experts agree are needed

I attended a housing industry event last week and the general consensus was that it remains in fairly rude health. Housebuilders’ profits remain strong, as do pipelines of work and the continued commitment of the government to boost the new homes market provide certainty to those operating within it.

So why, given these favourable conditions, do output and new orders within housing show signs of declining? There is no definitive answer, but if there was one concern noted above all others it was the issue of skills shortages hampering the collective productive capacity within the industry. This is a concern because construction growth over the past two years has been largely due to the increase in housebuilding.

What is even more worrying is that housebuilding levels are still significantly below what most experts agree are needed to meet demographic changes.

Fixing supply side issues are much more difficult than demand side issues as the success of schemes such as Help to Buy prove. Providing the answers is a challenge made even more difficult by vote winning announcements to build more houses. What is needed is a strategic approach from industry and government that looks to apprenticeships and imported labour, as politically potent as that may be, or the housing crisis will never be solved.

Michael Dall is an economist at Barbour ABI