Bill Jamieson: Future of construction on shifting sands

Central to any economic upturn is a healthy and expanding construction sector. But a notable feature of Scotland's lacklustre performance has been a serious lack of momentum in building activity.

Statistics for new house building in Scotland are flatlining. Picture: Christopher Furlong/Getty

Construction has continued to act as a drag on growth – with the sector down 6 per cent over the year. And recent data for 2017 suggests little turnaround just yet, with total construction work 2 per cent lower in cash terms in the first quarter of 2017 compared with a year ago.

Particularly worrying is that both commercial property activity and housebuilding are struggling to show momentum. Not that long ago Scotland’s housing market broadly followed England’s, with a time lag: rising prices in the southeast would be followed, 12 to 18 months later, by a gentler “ripple” rise in Scotland as the market nationally caught the breeze.

With the dramatic breakaway of London and the southeast, that relationship has broken down. Regional markets now have markedly different influences and dynamics.

After the huge surge in prices in the London region, reaction has set in. Prices soaring to ridiculous levels, masses of London workers priced out, worries about the economy, concerns over interest rates, and uncertainties over Brexit have led to a pronounced slackening in demand. Last week brought reports of sharp slumps in profits for major southeast estate agents such as Foxtons and Countrywide.

Scotland has not experienced anything like the London house price bubble. According to the Registers of Scotland, the average price of a property in Scotland in May was up 3.5 per cent on the same month previously at £143,106. The UK average for comparison was £220,713 (up 4.7 per cent on a year ago).

That may be cause for relief, but little cheer. For our housing sector, and the construction sector generally, continues to face serious and persistent headwinds.

Despite earnest pleading from the building sector and earnest pledges by government to lift the number of housing starts, these still trail way below the levels recorded before the 2008-09 financial crisis.

Total figures across both private and public sectors for completions are still more than 36 per cent down on 2007 levels – and still less than what was built in 2010. Homes for Scotland points out that the private sector is the biggest housing contributor overall yet the number of homes being started on site was down eight per cent in 2016, equivalent to more than 1,000 homes. Recent figures show house sales in Scotland down 17 per cent in March compared with a year ago.

But the malaise is wider. The latest Scottish Construction Monitor, a quarterly survey by the Scottish Building Federation out last week, showed the overall confidence index had gone negative, down seven points to minus five.

Employers point to growing fears over the future pipeline of new work. Government figures show strong output across many sectors of the industry over the year to March but major infrastructure projects are still making an outsized contribution to overall output – more than 20 per cent of the total.

By comparison, the infrastructure sector contributed less than £1 billion to construction output during the year to March. And the contribution from housing is down from more than 25 per cent to 19 per cent.

Builders worry that as major projects such as the Queensferry Crossing and the Aberdeen Western Peripheral Route draw to a close, the industry is likely to suffer a major contraction due to an apparent shortage of other work to fill the gap.

Scottish Building Federation president Stephen Kemp says many employers are increasingly nervous about prospects. “There is a feeling that the underlying fundamentals are not nearly as strong as record output figures might suggest. As that infrastructure work dries up over the next year or so, we could see the industry suffer a real shock.”

As for private sector housing activity, this has been hit by a combination of squeezed household incomes, the effects of higher Land and Buildings Transaction Tax (LBTT) and continued difficulty in securing planning consents.

Industry critics accuse builders of hoarding building land to force prices higher. Homes for Scotland chief executive Nicola Barclay, says “members [are] telling me that it has never been harder to open new sites and get homes out of the ground.

“What we need is a supportive policy framework which encourages housing investment and development, and which enables Scotland to reap these economic and social rewards.”

From a high point of about 41,000-43,000 completions a year in the 1970s, mainly in the public sector, this was down to 21,600 completions in 2007, before slumping to just under 15,000 in 2013. For last year, the completions total had managed only a minor recovery to 16,500.

New housing statistics show overall output in Scotland continuing to flatline with only 88 more homes (one per cent) built in 2016 than the year before. Figures also indicate that things won’t be improving any time soon.

Meanwhile Scotland’s replacement for Stamp Duty continues to hit the market. Official figures show that LBTT generated revenues of around £481 million in 2016/17, almost £57 million below the government’s forecast though up around £65 million on the previous year’s tax take.

Just over £214 million was raised from commercial property in 2015/16, dropping to around £177 million in 2016/17. And the downturn continues. Revenue Scotland data shows that commercial receipts from LBTT fell 31 per cent in June compared with the same month in 2016.

LBTT revenue has been boosted by the second homes 3 per cent “slab tax” (called the Additional Dwellings Supplement, or ADS). This generated £10.5 million in May and accounted for nearly a quarter of all LBTT revenue that month.

David Melhuish, director of the Scottish Property Federation suggests that if the 10 per cent residential LBTT threshold could be raised to £500,000 from its current level of £325,000 this would stimulate more activity, help transactions – and boost tax revenue.

Without more infrastructure spending and a greater push to encourage housing starts, Scotland’s construction sector faces a period of long and debilitating stagnation.