Construction Boosts Economic Growth

Increased construction output has helped to boost the UK economy, with the latest UK GDP output for the second quarter of 2013 revised upwards.

The Office for National Statistics (ONS) said the economy grew by 0.7% in the three months – which was up 0.1% from the estimate released in July.

Improvement has been seen in all sectors of the economy but construction has fared particularly well, raising expectations that the economy will power out of its five-year slump.

So what does this mean in terms of industry revival?

“Unlike previous recoveries, the construction sector has not been left on the sidelines as the service sector powers ahead,” explains Eimear Daly, head of market analysis at Monex Europe.

“The broad based growth raises the prospects that this recovery is the real deal and any traction in the construction sector is sustainable,” Daly says.

And when you break down the figures, it certainly seems to be the case. In Q2 2013, output in the construction industry was estimated to have increased by 1.4% compared with Q1 2013 – which saw construction output at its lowest level since Q1 2001.

The boost in construction output is being put down to the latest government initiatives, such as Help to Buy, that has been put in place to help boost house building across the country.

But despite this boost in output, many experts are warning that the government’s schemes could be encouraging people to overstretch themselves and cause a housing bubble.

Research by the Intermediary Mortgage Lenders Association (IMLA) shows that almost two thirds of intermediary lenders and brokers singled out a house price bubble as the most likely factor that may undermine the government scheme.

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Lenders already anticipate a 2.7% increase in the average house price by the end of the year, the report said, pushing it to £166,418 according to the Land Registry measure.

This prediction is based on the market’s performance in the first half of 2013 and the initial impact of the Help to Buy equity loan scheme.

If this same growth rate continues for the duration of Help to Buy, then the IMLA said the average house price will reach £180,265 by the end of 2016: an overall rise of 11% in four years.

This would bring house prices close to their last peak of £181,975, which was recorded in November 2007 – leading to concerns that the rate of increase could be even greater with the upcoming Help to Buy mortgage guarantee offer still to launch in January 2014.

“There is a clear consensus that first-time buyers stand to benefit most from the second part of Help to Buy. But if house prices continue to rise for the duration of the scheme, then in essence we will be giving with one hand and taking away with the other,” said Peter Williams, the IMLA’s executive director.

“If people are struggling to raise deposits in the current climate then a further 11% increase in house prices will lift the property ladder even further out of reach for some,” he added.

However, , the communities secretary, has rebuffed the concern, arguing that the coalition’s package of measures to boost housing is working, with “house building and housing supply on the up”.

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“The tough decisions we’ve taken to tackle the deficit are now delivering a sustainable increase in housing and it’s clear that the Help to Buy: Equity Loan scheme is working well and Britain is building again.” Pickles said.

The industry has also hit back at the claims – with many house builders praising the government’s schemes for helping to address the issue of mortgage finance – particularly as this increased access to finance has helped many house builders to increase their output levels to meet increasing demand in the market.

And as Daly explains the 1.4% quarterly increase in construction output should help to eradicate fears of a housing bubble being created as, “the uptick in construction explains rising house prices throughout the second quarter.”

The robust second quarter construction growth proves that house price rises are the result of structural improvement in the construction sector and not just a bubble ready to burst,” she concludes.

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