J
jister
Guest
After reading this article in the Irish independent this morning I believe it must be turning into a Pyramid scheme:
A large chunk of economic growth is being driven by the construction industry - but how will that growth be affected when the building sector turns down?
THERE is no doubt now that over 80,000 new dwellings will be completed this year. In the last three years, one dwelling has been built for every ten adults in the country, including all those who already had one. What on earth is going on?
Yet prices, while not galloping ahead at their previous breakneck speed, appear still to be clipping along at around a 9pc annual increase. Even more amazing, and perhaps alarming, are suggestions from estate agents that we might get a similar pace of building next year as well.
It is a little early to be definite about that. But given what we know about planning permissions and registrations, it seems unlikely that fewer than 70,000 more units will be built next year.
This must be more dwellings than there are people to live in them, or else all the statistics about population and household formation are complete nonsense. They may be a bit wrong, but they can hardly be that wrong. Indeed, Davy Stockbrokers reckons that around half the new homes built in the last seven years must be empty, or being used as second homes.
This also seems hard to believe, although it is clear that a lot of people have acquired second properties for themselves, and there are reports of vacant and unsold properties, at least in certain areas. Like all these kinds of things, we will not know for sure until the fat lady sings - either an aria on the joys of a soft landing, or the Gotterdammerung of a price collapse.
But, if we may not be sure what drives the house-building boom, we have a very good idea of what is being driven by it - a large chunk of economic growth. This was very clear from last week's figures for such growth in the second quarter of the year.
The scale of house-building in 2004 translated into a 20pc increase in construction in the April-June period compared with the same period last year. It is a spectacular rate of growth, and all the more spectacular when one considers the importance of construction in the whole economy.
On CSO figures, construction made up a quarter of the 4.1pc year-on-year growth in national income (GNP). On other figures, it is even higher. If we take a shorter snapshot, starting in 2003 rather than the CSO statistical base of 1995, then half the growth came from construction - most of it housing.
Nothing wrong with that, per se. Construction, after all, is the very essence of output. What could be more solid than bricks and mortar, followed by furniture and fittings? It is a lot easier to understand than the contribution of software writing, never mind fund management.
But it does make it necessary to take a more careful look at those buoyant growth figures. They seem to confirm forecasts that, for the year as a whole, the economy will grow by at least 5pc in real terms, which is about as good as it gets.
However, while we may not know what the property market is doing, still less where it will peak, we do know that building cannot continue at this pace for ever. Just as Celtic Tiger growth rates would have made the Irish economy the size of the United States' in 25 years, so 80,000 units a year would eventually see every adult living alone in a place of their own, in rather less than 25 years.
When construction does turn down, it will produce a significant drag on growth. This is one of those rare, but useful, moments to recall what "growth" means. It is not the actual level of income or output, but the increase from one year to the next. If house-building falls from 80,000 a year to 70,000, it is still 70,000 extra homes, and an extraordinary level of output, but it is negative growth. Such are the ways of statistics.
As the chart shows, there has always been a strong connection between construction and GNP, but the building industry is now so big that negative growth there would knock a good chunk off national growth.
Nothing short of disaster would produce a fall in national figures. But, without the contribution of construction, annual growth in the second quarter would have been 3pc on the CSO measure, and 2pc if based on last year's performance. And remember, anything less than 80,000 houses next year and there is no contribution from that sector.
So it is worth looking at the other components of growth up to June. Suddenly, things look a good deal more pedestrian. In particular, the rise in personal consumption, at 2.2pc in real terms, was a lot less impressive than many had hoped.
Consumption - the main driver of the economy - had been muted for the previous twelve months. Analysts still hope for something better in the second half of the year. Retail sales figures - and my Henry Street indicator mentioned a few weeks ago - suggest their hopes may be realised as people become more confident about job prospects and the general economy.
The same may not be true of industry, where production statistics and the monthly NCB survey suggest performance remains modest. The CSO put year-on-year growth at 2.9pc to the second quarter. Export growth of 6.6pc is flattered by comparison with the disasters of this time last year. The fact is that exports have grown just 5pc in nine months of "recovery".
How does one square this solid, but hardly exciting, performance against the buoyant tax revenues revealed on Monday, and forecasts of a new tiger cub delivering 6pc growth over the next several years? Well, house-building is a real boon for the Exchequer, in everything from stamp duty to VAT on furniture.
As for the outlook, it must be said that the figures for jobs growth are highly encouraging, and this is swelling both government coffers and national income. One of the great unanswered questions is how the economy generated so many jobs in the early stages of recovery. If it continues to do so, the optimists may well be proved right in the end - or as near as makes no difference.
A large chunk of economic growth is being driven by the construction industry - but how will that growth be affected when the building sector turns down?
THERE is no doubt now that over 80,000 new dwellings will be completed this year. In the last three years, one dwelling has been built for every ten adults in the country, including all those who already had one. What on earth is going on?
Yet prices, while not galloping ahead at their previous breakneck speed, appear still to be clipping along at around a 9pc annual increase. Even more amazing, and perhaps alarming, are suggestions from estate agents that we might get a similar pace of building next year as well.
It is a little early to be definite about that. But given what we know about planning permissions and registrations, it seems unlikely that fewer than 70,000 more units will be built next year.
This must be more dwellings than there are people to live in them, or else all the statistics about population and household formation are complete nonsense. They may be a bit wrong, but they can hardly be that wrong. Indeed, Davy Stockbrokers reckons that around half the new homes built in the last seven years must be empty, or being used as second homes.
This also seems hard to believe, although it is clear that a lot of people have acquired second properties for themselves, and there are reports of vacant and unsold properties, at least in certain areas. Like all these kinds of things, we will not know for sure until the fat lady sings - either an aria on the joys of a soft landing, or the Gotterdammerung of a price collapse.
But, if we may not be sure what drives the house-building boom, we have a very good idea of what is being driven by it - a large chunk of economic growth. This was very clear from last week's figures for such growth in the second quarter of the year.
The scale of house-building in 2004 translated into a 20pc increase in construction in the April-June period compared with the same period last year. It is a spectacular rate of growth, and all the more spectacular when one considers the importance of construction in the whole economy.
On CSO figures, construction made up a quarter of the 4.1pc year-on-year growth in national income (GNP). On other figures, it is even higher. If we take a shorter snapshot, starting in 2003 rather than the CSO statistical base of 1995, then half the growth came from construction - most of it housing.
Nothing wrong with that, per se. Construction, after all, is the very essence of output. What could be more solid than bricks and mortar, followed by furniture and fittings? It is a lot easier to understand than the contribution of software writing, never mind fund management.
But it does make it necessary to take a more careful look at those buoyant growth figures. They seem to confirm forecasts that, for the year as a whole, the economy will grow by at least 5pc in real terms, which is about as good as it gets.
However, while we may not know what the property market is doing, still less where it will peak, we do know that building cannot continue at this pace for ever. Just as Celtic Tiger growth rates would have made the Irish economy the size of the United States' in 25 years, so 80,000 units a year would eventually see every adult living alone in a place of their own, in rather less than 25 years.
When construction does turn down, it will produce a significant drag on growth. This is one of those rare, but useful, moments to recall what "growth" means. It is not the actual level of income or output, but the increase from one year to the next. If house-building falls from 80,000 a year to 70,000, it is still 70,000 extra homes, and an extraordinary level of output, but it is negative growth. Such are the ways of statistics.
As the chart shows, there has always been a strong connection between construction and GNP, but the building industry is now so big that negative growth there would knock a good chunk off national growth.
Nothing short of disaster would produce a fall in national figures. But, without the contribution of construction, annual growth in the second quarter would have been 3pc on the CSO measure, and 2pc if based on last year's performance. And remember, anything less than 80,000 houses next year and there is no contribution from that sector.
So it is worth looking at the other components of growth up to June. Suddenly, things look a good deal more pedestrian. In particular, the rise in personal consumption, at 2.2pc in real terms, was a lot less impressive than many had hoped.
Consumption - the main driver of the economy - had been muted for the previous twelve months. Analysts still hope for something better in the second half of the year. Retail sales figures - and my Henry Street indicator mentioned a few weeks ago - suggest their hopes may be realised as people become more confident about job prospects and the general economy.
The same may not be true of industry, where production statistics and the monthly NCB survey suggest performance remains modest. The CSO put year-on-year growth at 2.9pc to the second quarter. Export growth of 6.6pc is flattered by comparison with the disasters of this time last year. The fact is that exports have grown just 5pc in nine months of "recovery".
How does one square this solid, but hardly exciting, performance against the buoyant tax revenues revealed on Monday, and forecasts of a new tiger cub delivering 6pc growth over the next several years? Well, house-building is a real boon for the Exchequer, in everything from stamp duty to VAT on furniture.
As for the outlook, it must be said that the figures for jobs growth are highly encouraging, and this is swelling both government coffers and national income. One of the great unanswered questions is how the economy generated so many jobs in the early stages of recovery. If it continues to do so, the optimists may well be proved right in the end - or as near as makes no difference.
