Slowdown will stabilise construction

The slowdown in economic growth should be welcomed by the Irish construction industry. For the past two or three years the Irish construction industry has been overheated and overstretched. Resource problems, particularly with regard to skilled labour, have been acute and have led to a dramatic rise in labour costs which has fed into construction costs generally.

At a time of generally high inflation, construction inflation has far surpassed any other sector.

Tender inflation - the prices builders are bidding for new building contracts, as measured by the PKS Tender Index - has risen 30 per cent over the past two years.

Lead times for key components such as lifts and structural steel have lengthened and scarce skilled labour has meant that contractors are struggling to maintain programmes on many projects.

In this context any relaxation of demand can only help to stabilise the situation and ensure that supply is more equal to demand.

For the past nine months, housing has shown a steady decline. The number of new house starts has declined significantly from the peaks of 1999/2000.

From a national and a purely sectoral point of view, this decline in housing starts is to be regretted. We still have a large number of people looking for starter homes at affordable prices and the health of the economy generally depends very much on our being able to provide affordable housing for our growing young workforce.

Unfortunately the dramatic reduction in the number of housing starts will do little to reduce the cost of housing in the short term. Almost two-thirds of the cost of housing is the cost of land. Any reduction in supply while demand remains strong will not help to bring new houses to a price that the average couple can afford.

However, despite being bad news for housebuilders and potential buyers, the decline in housing starts is no bad thing for the construction industry generally, in that it frees up scarce resources which now become available for general construction projects.

The other area of construction that has now slowed or stopped is speculative development for offices, particularly out-of-town office developments.

Developers and, more particularly, their banks are being much more cautious in embarking on new developments without guaranteed tenants.

In this whole area, the banks for the past 18 months have been more and more careful in assessing projects and in refusing new loans. The bankers' caution is to be greatly welcomed in that, with a slowing market given a shock by the events of September 11th, few banks are overlent in the speculative area.

The remainder of construction activity - civil engineering and general contracting - depends very much on public sector finances. For the past three years, the public capital programme has seen more and more money invested in building projects - roads, bridges, water and sewage treatment, as well as hospitals, schools and colleges.

In this area, the upcoming budget and public capital programme for 2002 is of vital importance in ensuring that the momentum of infrastructural development is maintained. Charlie McCreevy and the Government must take a medium to long-term view and not take the easy route of trimming capital investment.

The Taoiseach's recent commitment to investment at the PPP global summit is to be welcomed when he stated that he is "determined to continue to invest heavily in the infrastructure programme of the National Development Plan to ensure that we are in a position to fully benefit from the recovery when it comes".

At the same conference, Martin Cullen, Minister for State at the OPW, stated that "the National Development Plan should be delivered in full".

With these commitments underpinning the National Development Plan and a realistic approach in the forthcoming budget, the Irish construction industry should not overreact pessimistically to the current economic conditions.

In the short term, housing and speculative commercial development will be hit but the majority of other construction spends will continue to be underpinned by the Government's commitment to the National Development Plan.

Presumably, any incoming Government formed after an election in 2002 will take a similar view.

A year ago I took the view that, because of resource constraints, the National Development Plan would not and should not be delivered in the 2000-2006 timescale set out in the Plan.

Today I take a different view in that the resource constraints that existed 12 months ago are freeing up, and with prices stabilising, now is the time to deliver on the NDP over the coming six to seven years.

"Nice to have" projects such as Stadium Ireland - and here I must declare an interest, as my firm are project managers for the project - which a year ago might have helped to overheat an already overstretched industry can, in the time-scale envisaged, be achieved with the resources available to the Government and without any negative effects on the construction industry.

All in all, I believe the doom and gloom is overstated and that major long term projects on site, together with new projects from the National Development Plan, will help to stabilise the industry at realistic levels of activity, rather than the overstretched, overheated situation we have experienced over the past number of years.

Michael Webb is managing partner of PKS Chartered Quantity Surveyors and President of the European Committee for Construction Economics