George Kerevan: We must ensure construction builds on past successes

Published on Monday 6 September 2010 21:59

I HAD the pleasure yesterday of addressing the annual conference of the Scottish Federation of Housing Associations (SFHA), debating the economic outlook with the BBC's Brian Taylor and longtime Scotsman politics seer, Hamish Macdonell.

SFHA members are at the forefront of providing low-cost rented accommodation, a market that is increasing as people are forced to turn away from home-ownership. But the SFHA is also a prime mover in determining the overall volume of house construction north of the Border, providing the funding for more than one-fifth of total annual build in a normal year.

In today's abnormal conditions, with private house building halved, the SFHA is now funding one third of completions. Take that demand out of the market and the already battered Scottish construction sector - which employs 200,000 people, or 8 per cent of the workforce - will be in even worse trouble. And that's about to happen because the SFHA is funded from the public purse and the purse strings are about to get tighter.

As it is, the construction sector in Scotland has been kept on life support over the past two years thanks to an acceleration of public spending. This was achieved by bring forward the capital element of three-year Treasury subvention to Holyrood under the Barnet Formula.

The Scottish Government had hoped the resulting capital shortfall created in later years would be filled by bringing forward cash from the subsequent three-year spending round. But Chancellor Osborne, determined to shrink the size of the public sector, has vetoed this. Things will get even worse as the overall capital budget in Scotland is squeezed. The previous Labour administration chopped 40 per cent from capital spending from future spending rounds and Osborne has cut even more. Cosla, the umbrella body for Scotland's local councils, is predicting an annual fall of 400 million in council capital investment over the next four years. That's about one fifth of the total council spending on infrastructure such as schools and roads.

The obvious question arises: with interest rates at rock bottom, why can't the private sector take up the construction investment slack? For a start, with mortgage lending tight and consumer confidence fickle, private demand in the housing and commercial property markets remains lacklustre.

In fact, the latest figures from the UK Construction Products Association (CPA) suggests building output has actually started to decline again in the second half of this year - a double dip - as Labour's original fiscal stimulus came to an end and market sentiments turned negative.

Over the summer, reservations by prospective home buyers have fallen back to the dire level of 2008, when the market was at its lowest thanks to the credit crunch. This signals that consumers are growing more pessimistic in the wake of the coalition's spending cuts.

The storm could be worse in Scotland, where the public sector constitutes half the economy. The latest Construction Market Survey from the Royal Institution of Chartered Surveyors in Scotland reports a return to falling workloads after a period of growth at the start of the year.

If the private construction market is double dipping, we need to find emergency ways of mobilising fresh public investment in infrastructure and housing yet without frightening the financial markets.

One answer in Scotland might be to use the 50m already earmarked for the Scottish Investment Bank (SIB) not as investment capital itself but to buy insurance for borrowing by bodies such as SFHA, or consortia organised by the Scottish Futures Trust. The SIB, as underwriter, could even make a profit on the deal.

To boost returns, and encourage consumer demand, we have to do something about high building costs. Scottish residential land prices are still absurd given the downturn. A hectare will cost you 2,350,000 in Edinburgh, 1,100,000 in Glasgow and 2,100,000 in Aberdeen, according to the Valuation Office Agency.

High land prices have a lot to do with planning red tape limiting supply. It is now one year since the SNP government streamlined the planning laws, devolving more responsibility to local authorities. Unfortunately, this seems to have encouraged conservative council attitudes rather than the partnership with the construction industry that was intended. That has to change quickly if we are to kick-start construction in Scotland.