Last year, the market was about to fall off a cliff. This year, orders are up, house prices are up, and Wimpey is starting a yuppie housing scheme it mothballed last year. Too good to be true?
Last autumn, Wimpey’s decision to suspend work on its lavish Docklands apartment block, Western Beach Plaza, was seen as a harbinger of economic collapse. The Far East was in turmoil, Russia had imploded and Britain was about to be engulfed in the fall-out of what was nothing less than global meltdown … or so the argument went.

Ten months on, Wimpey is dusting off plans to build the block of 119 apartments, aimed at City high-flyers for £100 000-300 000. And all the signs are that its sales team is about to be rushed off its feet.

Jarvis, the contractor on the scheme, declined to comment on the project, but Wimpey has confirmed that it is “reviewing the situation” and it is understood that Jarvis could be back on site by Christmas.

So, what has happened to change Wimpey’s mind? And is the rest of the industry back in boom?

One reason the industry is feeling so good about itself is house price inflation. Last week, the Nationwide revealed that prices were rising at their fastest rate for six years. As ever, London, the South-east and a few other hotspots are seeing the biggest surges, with more modest rises in other areas.

Construction orders are also increasing at a healthy rate. Again the picture was different last November: orders had slumped and the industry was anxiously hoping millennium spending would get it through the worst of the coming downturn. Last month, the Chartered Institute of Purchasing & Supply reported that orders rose for the 10th month running.

Bovis chief executive Luther Cochrane confirms these findings. He says: “In the UK a year ago we would probably have been quite cautious. But the construction market continues to look good and the industry is in reasonably good condition, too.”

Skills and materials shortages

Most observers say the increase in new work is being driven by the wealth of millennium projects and the South-east housing boom. But with the increase in work comes the problem of skills shortages and lengthening delivery times.

This month, the CIPS survey found that an increasing number of suppliers of construction packages were unable to expand capacity enough to meet short-term orders. Average lead times have lengthened for the fifth month running. The availability of subcontractors is a problem, allowing them to increase their rates. The CIPS also reported “a perceived decline” in the quality of subcontractors available.

Some industry sources echo these concerns. One project manager at a major consultant complained of a lack of bricklayers and other skilled labour in South Wales. He said: “I’ve seen notices going up on town halls and church halls saying ‘bricklayers wanted’. That’s always the first sign of trouble.”

A project manager for a small contractor that works in Manchester and the West Midlands said: “We are paying up to £100 a week extra for bricklayers compared with six months ago, and we are finding them increasingly hard to find.”

Shortages are not restricted to the trades. The managing director of one top 20 contractor said: “Project managers and QSs are being poached. And we are having to pay upwards of 10% extra to hold on to our staff in those disciplines.”

I’ve seen notices going up saying ‘bricklayers wanted’. That’s the first sign of trouble

Project Manager

Hype or overheating?

So, all the signs are that construction is in boom, but is it about to overheat?

With the Bank of England’s Monetary Policy Committee meeting this week to decide any changes to the base interest rate, the question is at the top of the national economic agenda. If the bank does begin to apply the brakes, some pundits will consider the move overdue. Credit Lyonnais senior analyst Fred Wellings, for example, predicted that a rate hike would be made last month, when he warned that the housing boom would probably explode before the year was out.

A straw poll of the industry, however, reveals a rather more sanguine attitude to the market. Oliver Whitehead, chief executive of Alfred McAlpine, believes the newspapers have exaggerated the house price rises. He says McAlpine’s prices have gone up only 5% per square foot in the past 12 months.

He also dismisses any talk of a crisis in the supply of skilled labour. “Every summer, the industry has a big whinge that we can’t get enough bricklayers. You won’t hear us [McAlpine] complaining about that because it’s our job to manage the problem.”

Bovis’ Cochrane has a similar view:

“You constantly hear talk of skills shortages, but we don’t see a shortage. Having lived in the USA in 1995-97, when there was talk of an absolute lack of skilled tradesmen, I remember that all the work got done at the end of the day. There was even talk of the trade contractors putting the stories around to cash in.”

Michael Coates, senior partner at QS Gardiner & Theobald, also says that talk of overheating is unfounded. “As far as we can see, everything is ticking along nicely,” he says.

But how long the boom conditions will last is not clear. Coates says: “We see a lot of heat going out of the market next year.”

Construction Forecasting and Research managing director Jacquie Cannon says: “Everyone is waiting to see what will happen to the leisure and entertainment sector post-millennium. In the past five years, it has become as large as the retail sector and is a massive area of construction spend. Many people are saying that the market has to come down as the projects dry up.”

For most, however, the overwhelming feeling is of relief. Last year, it felt like the end of the world for businesses recovering from years of struggle.

Five signs that the industry may overheat

  • House prices are rising at their fastest rate for six years
  • Construction managers are reporting shortages of skilled labour
  • Delivery times are lengthening as materials producers struggle to meet demand
  • Subcontractors are raising their prices
  • Trades are using their strong position, especially on landmark millennium projects, to lever large pay increases from their bosses