Warning on housebuilding pressure will be hard sell for Government

In its latest report, the Fiscal Advisory Council warns that a massive supply response to the current housing crisis – which it seems the Government is targeting, egged on by the public – is in danger of overheating the economy.

The problem, in the council’s view, is that the economy is already rebounding rapidly from the crash and a big pick-up in construction will throw us over the edge, bidding up prices and wages, and undermining competitiveness in a throwback to the mid 2000s.

It acknowledges that a stronger supply response is necessary to rein in rising prices and rents, but the scale and speed of the response is what’s at issue.

However, a more gradual pick-up in housebuilding, while economically prudent, will be an extremely hard sell for the Government, which is already getting it in the neck over its slow response to the crisis.

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The council warns that overheating could occur if a sharp supply response to pent-up demand in the housing market were to lead to very strong construction-led growth. However, it does not specify what constitutes “very strong” construction growth.

And already the property market is the main driving force behind domestic economic activity, fuelling increased levels of consumption (via rising rents) and investment (via house and office building).

Full employment

Job creation in construction is likely to accelerate the return to full employment by the end of 2018, two years quicker than previously expected.

However, even with these rates of growth, it’s questionable whether we have the current capacity to jump the home building rate to the level required, which is now put at 30,000-40,000 units per annum.

A decade ago, there were 270,000 workers employed in the construction industry here, now there are fewer than 120,000 and most are involved in the commercial sector.

Every additional 10,000 new-build homes needs an extra 20,000 skilled workers, which means we’re likely to require an influx of foreign workers to address the shortfall.

In its report, the council says returning the housing sector to normal levels of activity, and presumably this means where supply meets demand, will “have a significant bearing on the cyclical position of the economy”.

But normal levels of housebuilding seems to be the very thing that has eluded us for decades. Imbalances in construction were significant factors in the lead-up to the crash and they now seem underpin the current crisis.

Given that construction activity is quite tax rich, the council said that significant changes in the construction sector output were likely to yield large changes in tax revenue, which it warned should not used for current spending, as was the case in the 2000s.