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Unit / Module Title Business Environment -- Economics

Unit / Module Code 06C

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Assignment Title & No. Assignment 2 Economics

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Report
Contents

Page
1. The downturn of housing output from an economic
perspective
4Strategies for construction agents to secure on going
activity
6.. The active involvement of the Government in encouraging
investment and growth in the construction industry
9References
10..Annex 1
 1. The downturn of housing output from an economic perspective

Following the credit crunch of 2008 as a consequence of the problems

faced by the US mortgage market, the lending market in the UK fell
significantly as well. While many of the big players in the UK mortgage industry
were lending money financed from other banks, they were faced with a
shortage of finances after these markets/lenders seized lending.
As a result, mortgages have become more expensive and harder to obtain,
causing a decrease in demand, as potential buyers/borrowers were less likely
to be granted a loan. This increase in mortgage interest has a significant impact
on consumer spending - consumers will most likely spend less and there will be
an increased incentive to save.

Price Level

AS

P1

P2

AD1

AD2
Real GDP
Y2 Y1
(Economicshelp.org, 2016)

This in turn has caused the housing market to fall, leaving many in negative
equity, which added further to the banks' losses as the properties were worth
much less than the buying price for which the loan was granted, bringing the
balance to a negative trend. Therefore, lenders have become more cautious
about lending money which were scarce, forcing them to raise interest rates to
cover the deficit and imposing higher deposits.
Following the housing market economic boom, after so many people were
granted mortgages that they could not afford, lenders are currently stricter
with applications.
Despite the efforts that subsequent Governments have put in, starting
with Labour's since 2008, continuing with the coalition Government and now
on going with the Conservatives, construction output was consistently low.
Except the big or very big companies which were able to secure contracts from
the biggest client, the Government, many have failed to secure lucrative
contracts and eventually went bankrupt.
The Government and the Bank of England are maintaining historical low
interest rates to encourage more spending and indeed more lending by the
financial institutions. However, people as consumers and banks as lenders are
more reluctant at splashing out liquidities to avoid going into debt. This has a
negative impact on the economy as a whole not only on the construction
industry. Lack of construction output means less jobs, less contribution to the
economy, and subsequently an increase in unemployment which was very
sharp in 2009. (Construction skills, 2016) indicate that 170 000 redundancies
happened in the year to august 2009 alone, although the figures show that the
sector is slowly recovering as consumer confidence is slightly improving.

The quantitative easing scheme that the Government arranged a few

times to secure cash availability on the markets in an attempt to stimulate the
economy, as well as the low interest loans for small companies and businesses,
didnt really have the expected effect: Construction output is a key component
of the production approach to measuring Gross Domestic Product (GDP),
accounting for 6.3% of the economy in Q2 2013. The construction industry grew
steadily from 2000 to 2008, where total output increased by 17.1% between Q1
2000 and Q1 2008. However, the worsening economic conditions following the
financial market shock of 2007 have had a marked negative effect on the
industrys output, which has fallen by 15.8% from Q1 2008 to Q2 2013
(Foundation, 2016)
(Foundation, 2016)

In 2014 the construction industry in the UK contributed 103 billion in

economic output, 6.5% of the total and 2.1 million jobs or 6.2% of the UK total
were in the construction industry in Q 2015. The construction industry,
particularly house building, faired badly during the recession. Output in the
construction sector fell faster than the whole economy in 2008. 2009 saw the
sector recover faster than the economy as a whole, and 2010 and 2011 saw
broadly flat growth, followed by another contraction in 2012 and partial
recovery through 2013. (Rhodes, 2015)
Workforce jobs in the construction industry, UK

Millions % of all jobs

1982 1.79 7.0
1992 1.94 7.0
2005 2.18 7.0
2006 2.25 7.1
2007 2.30 7.2
2008 2.28 7.1
2009 2.24 7.1
2010 2.08 6.6
2011 2.05 6.5
2012 2.05 6.4
2013 2.04 6.4
2014 2.10 6.3
2015 2.11 6.2
(Rhodes, 2015)

2. Strategies for construction agents to secure on going activity

The construction industry, as a secondary sector within one

countrys economy is somewhat dependant and interconnected with the
primary sector as it produces finished, usable products with the output of
the primary sector and manufactures finished goods. Nonetheless, the
construction industry is interrelated with the other three sectors of the
economy, as it will have to use more than one sector to produce
products.
For example, the forestry industry from the primary sector produces
prime material (timber/wood), which is processed into timber products
that will be used in construction process, such as: engineered wood
products (beams, frames etc.), doors, windows etc. Then, the finished
products (houses, apartments, commercial units) are sold through estate
agents from the tertiary sector. Construction is also connected with the
quaternary sector through research, producing knowledge, innovation,
and looks to new ways to improve productivity producing new ideas,
cutting costs or finding new markets.
In order to secure continuity, a construction company must focus on
optimising the management of the supply chain, and add value to the
finished product through quality, design, branding and production.
Construction output includes private and public sectors work,
housing and non-housing work, as well as new works, repairs and
maintenance. The production methods are more labour intensive than
manufacturing industry because man cannot be replaced by machines in
certain area of the construction industry. Therefore, investing wisely in
training of people can only improve productivity (Alport, 2016)
Efficient management at design stages, procurement and supply
chain management will also bring only benefits to a companys
productivity and efficiency.
In the current climate the finished product will have to meet certain
criteria such as: energy efficiency, environmentally friendly, sustainability
and high standards health and safety records. To meet the latest
requirements by the Government, companies will have to adapt
continuously by employing new concepts such as Lean construction or
Building Information Modelling (BIM), with the latter becoming a
condition this year for all the Governments contracts. BIM will have to
be implemented by all tenders, as the Government is looking to reduce
cost by at least 20 percent during the term of the current Parliament
(Cambridge,2016). BIM was used in the design and construction of the
new 237m, 270 bed Alder Hey in the Park, part of Alder Hey Childrens
Hospital in Liverpool, which opened in October 2015. The use of BIM
allowed greater integration of the building as a whole entity across the
design elements. It streamlined the coordination between the design
team, structural engineers and the manufacturing facilities and enabled
the Design for Manufacture & Assembly (DfMA) process to produce the
hospitals structure and mechanical and electrical modules. BIM enabled
greater supply chain integration and the use of optimised standard
processes and units throughout the hospital. In this way BIM greatly
contributed to this being one of the fastest hospitals ever produced in the
UK (https://www.gov.uk/government/uploads, 2016)
Apart from the contracts with the main client in UK, the Government,
more construction firms undertake work overseas, especially in the oil
rich countries, although these contracts do not contribute greatly to the
balance of payments because the contract sum is spent mainly on local
labour and materials (Alport,2016) which benefits only that countrys
economy.
The never ending exchange between money and products within
production, manufacturing, service sectors and consumers will incur
more and more taxes collected by the Government which in turn will give
back as subsidies such as grants or benefits. (Alport,2016)
There are no substitutes in the construction industry that could
possibly disrupt it in such way that it will cause it to completely cease.
The need of a roof above heads will always be actual and the product
that construction industry offers will always be scarce as economies tend
to be ruthless in the sense that the richer will only grow richer in the
detriment of poor people. The Government is probably trying to balance
this, although some may think it is not doing enough. As a consequence,
the construction companies will only need to follow Governments ruling
in order to secure financial stability through future contracts even though
this would be achieved at taxpayers expense at the end of the day. The
provision of affordable housing being a condition to prospective house
builders in order to secure contracts is at least hypocritical as there are
no assurances that targeted low income or young prospective customers
could possibly get the loans required to become owners of these
properties. The market has become increasingly speculative as the
housing sector offers in the current environment all the possibilities to
financial potent buyers which often pay upfront comparing with mortgage
dependant customers.

3. The active involvement of the Government in encouraging investment

and growth in the construction industry

The construction industry is a large and important sector of any countrys

economy and so is the case within the UK. In 2014 construction output was
103 billion, 6.5% of GDP, and comprised 2.1 million jobs, 6.3% of the UK jobs
total (Rhodes, 2015). There are many areas involved, such as suppliers of raw
materials, machinery manufacturers, transportation, producers of building
components and others.
There is a huge supply chain in which all of the above and many others are
involved and depend on one another and construction activity can be involved
in private and public sector, housing and non-housing work, new work, repairs
and maintenance.
However, the most important sector of all is the house building sector
due to the many aspects that influence UKs economy overall. Not only this
sector brings a significant contribution to GDP, through employment and
finished products, but many other aspects ought to be taken into consideration
in regard to its importance related to social factors.
 The UK has seen a shortage in the housing sector, which the Government
is actively seeking to tackle through economic measures by increasing the
output. The authorities have come up with programmes intended to stimulate
the economy while addressing social problems such as housing shortage, due
to demographic changes that have increased demand, possibly caused by an
increase of financially secured elderly people, one parent families, one parent
households, etc.

Price
S

P2

P1

D2
D1
Quantity
Q1 Q2

(Johanneds.files.wordpress.com, 2016)

Authorities have taken steps to simplify and relax the planning

permissions, which gave a chance to small and medium builders to gain more
work through work dedicated to house extensions such as loft conversions or
rear extensions to properties and family homes. While demand will always be
high, resources as a consequence will be low because the offer will not always
suffice the demand. The shortage of commodities, such as land, will always
place the supplier in an advantaged position, where the Government has the
option to be selective with tenders. And this so called bargaining power of the
suppliers" will be higher when there are many buyers and just a few suppliers.
The Government is the largest client of the construction industry. This
spring, they set out plans for projects worth 163 billion.
This scale brings with it challenges and opportunities such as improving
workforces skills, improving the productivity, making the economy more
competitive, achieving more value for money to which taxpayers are
contributing (Researchbriefings.parliament.uk, 2016). The annex attached to
this report highlights the objectives that the Government has planned for
growth in 2011. The Government Construction Strategy (GCS) 2016-20 sets out
the Governments plan to develop its capability as a construction client and act
as an exemplary client across the industry. GCS 2016-20 builds on the success
of GCS 2011-15 and will help departments meet the challenges of inflationary
pressure in a rising market by driving increased construction productivity
(https://www.gov.uk/government/uploads, 2016)
.
References

Alport, E. (2016). Business environment- Construction Economics.

Foundation, I. (2016). [ARCHIVED CONTENT] UK Government Web Archive

The National Archives. [online] Webarchive.nationalarchives.gov.uk. Available
at:
http://webarchive.nationalarchives.gov.uk/20160105160709/http://www.ons.
gov.uk/ons/rel/construction/output-in-the-construction-industry/august-
2013/sty-construction-industry.html [Accessed 2 Jun. 2016].

https://www.gov.uk/government/uploads. (2016). Government Construction

Strategy 2016-20 March 2016. [online] Available at:
https://www.gov.uk/government/uploads/system/uploads/attachment_data/f
ile/510354/Government_Construction_Strategy_2016-20.pdf [Accessed 5 Jun.
2016].

https://www.gov.uk/government/uploads. (2011). The Plan for Growth.

[online] Available at:
https://www.gov.uk/government/uploads/system/uploads/attachment_data/f
ile/31584/2011budget_growth.pdf [Accessed 5 Jun. 2016].

Johanneds.files.wordpress.com. (2016). [online] Available at:

https://johanneds.files.wordpress.com/2009/12/garlic-graph.jpg [Accessed 5
Jun. 2016].

Researchbriefings.parliament.uk. (2016). Research Briefings - The construction

industry: statistics and policy. [online] Available at:
http://researchbriefings.parliament.uk/ResearchBriefing/Summary/SN01432#f
ullreport [Accessed 5 Jun. 2016].

Rhodes, C. (2015). Construction industry: statistics and policy. House of

Commons Library, [online] 01432(01432-briefing paper). Available at:
http://www.parliament.uk/commons-library |
intranet.parliament.uk/commons-library | papers@parliament.uk |
@commonslibrary [Accessed 2 Jun. 2016].
 The Plan for Growth: Ambitions and Measurable Benchmarks
To create the most competitive tax system in the G20
A The lowest corporate tax rate in the G7 and among the lowest
in the G20
B The best location for corporate headquarters in Europe
C A simpler, more certain tax system
To make the UK one of the best places in Europe to start, finance and grow a
business
D Improving the UKs ranking in major international indices of
competitiveness
E A lower domestic regulatory burden
F More finance for start-ups and business expansion
G An increase in the proportion of planning applications approved
and dealt with on time
To encourage investment and exports as a route to a more balanced
economy
H Ensure the UK remains one of the top destinations for foreign
direct investment (FDI)
I An increase in exports to key target markets
J An increase in private sector employment, especially in regions
outside London and the South East
K Increased investment in low carbon technologies
To create a more educated workforce that is the most flexible in Europe
L Supporting more apprenticeships than any previous
government
M Home to more of the worlds top universities than any other
country except the USA
N An increase in the participation of 16-24 year olds in
employment or learning
O Narrowing the educational attainment gap, allowing everyone
to meet their potential
N Lowest burdens from employment regulation in the EU

Annex 1
(https://www.gov.uk/government/uploads, 2011)