2.3 Building Sector
1997 2003 1997-2003 €m €m Average Annual % Change
Actual Estimate In Value In Volume7
% %
Total Public Capital Programme 4,415 8,850 12.3 n.a.
Social Infrastructure: Public Housing 451 1,707 24.9 15.4 Educational Buildings 161 482 20.1 12.5 Hospitals 168 510 20.3 12.7 Government Construction 255 808 21.2 13.5 Sub-Total 1,035 3,507 22.6 14.1 Productive Infrastructure: Roads 475 1,606 22.5 14.0 Public Transport 123 646 31.8 22.5
Water and Sewerage Services 204 581 19.0 10.9
Energy 383 1,367 23.6 15.0
Sub-Total 1,186 4,200 23.5 14.9
Total 2,221 7,707 23.0 14.5
Source: Public Capital Programme 2003, Department of Finance.
Excluding estimated construction inflation over this period, the overall increase in public capital spending translates into a volume increase of around 14.5 per cent per annum on average (Table 2.2).8
This is almost three times the estimated average rate of GDP growth of 5.3 per cent per annum recorded over the same period.9
The rapid acceleration in construction output was caused by a substantial increase in investment across every segment of the construction sector, including housing, general contracting and productive infrastructure (civil engineering). It was thus inevitable that pressures on capacity would result, with adverse consequences for cost inflation. This was particularly noticeable in land and labour costs, with less evidence of inflation in the internationally-traded materials segments. It is important, over the remainder of the NDP period, to ensure that similar inflationary pressures do not arise and, if possible, that prices actually fall to help restore competitiveness.
The rate of construction tender price inflation accelerated from 4 per cent in 1995 to an average of 12 per cent per annum over the period 1998 to 2000. The costs associated with all of the stages in building and infrastructure projects, including those prior to construction, such as land acquisition, planning, insurance, design,
7 Based on estimates for construction inflation from the Annual Construction Review
and Outlook report published by the Department of the Environment, Heritage and Local Government, September 2003.
8 The PCP contains non-construction related expenditure, such as the purchase of
sites, capital equipment, rolling stock and information technology.
9 This average assumes a GNP growth of 1.5 per cent in line with the last Economic
legal and compensatory payments have all increased significantly in recent years.
In addition, the cost overruns on some major infrastructural projects, most notably LUAS, the Port Tunnel and some key national road projects, have also been attributed to cost increases arising from contractual disputes, delays and disruption, environmental issues and variations and additional works.
One benefit of the recent moderation in construction output growth has been a downward trend in inflation in some segments of the sector, most notably in general contracting. According to the
Annual Construction Review and Outlook (DoEHLG), there is considerable variation in tender price inflation across the various sub-sectors of the industry this year, with tender price inflation ranging from -4 per cent for private non-residential construction to 8 per cent for new private house building. Combined with an estimated average deflator of 3 per cent for new civil engineering infrastructure projects, overall construction inflation is expected to moderate to 4 per cent in 2003.
Figure 2.7: Decomposition of Demand for Housing
1991-1996 1996-2001 2001-2006 2006-2011 2011-2016 0 10 20 30 40 50 60
Per thousand of the populatiion
Second Houses Migration Change in Headship Population Growth
2002
The three-year period 2000-2002 was characterised by a deceleration in output growth of the building and construction sector (excluding housing), as the industry experienced a weakness in demand, continued increases in building costs and more competitive tendering, all of which are likely to have resulted in leaner margins for contractors. After a slowdown in the rate of growth in 2001, activity in the housing sector picked up again in 2002 and was the main sector supporting employment growth last year. Today activity in the general contracting sector remains weak, particularly the component of it which is funded by private investment.
MACRO-ECONOMIC BACKGROUND 23
10 Here defined as the nominal interest rate less the expected rate of inflation. 11 Headship rates are the proportion of each cohort who are reported as “heads of
household”.
12 Defined here as a dwelling that is not the principle residence of any household. Figure 2.8: Second or Replacement Dwellings
1976 1980 1984 1988 1992 1996 2000 0 5 10 15 20 25 Thousands
5 Year Moving Average
The demand for housing has been fuelled by rising living standards, significant demographic pressures and the very low real interest rates.10 All of these factors have contributed to the dramatic
increase in demand. The demographic bulge means that there is a high proportion of the population in their twenties – the age when individuals form new households. At the same time the proportion of the population in older age groups, releasing dwellings, is very low. This “natural increase” accounts for around 20,000 dwellings a year (Figure 2.7). In addition, headship rates are very low in Ireland by the standards of the EU but they are likely to rise with rising living standards.11 The immigration of skilled labour, which has
helped the economy to grow more rapidly, has also had to be housed. Finally, there has been an exceptionally high demand for second or replacement dwellings (Figure 2.8).
The demand for second dwellings12 or replacement dwellings is
estimated as the difference between housing completions and the change in the number of households given in the Census and the
Quarterly National Household Survey. The series in Figure 2.8 has been smoothed by taking a five-year moving average ending in the latest year. Figure 2.8 shows that for the five years ended in 2002 second or replacement dwellings accounted for over 20,000 of the annual output – over a third of the total. As shown in the model in Appendix 1, this element of demand has contributed to a substantial extent to the rate of inflation in house prices. As the second/replacement dwellings are disproportionately located in the Border, Midland and Western region it can be inferred that the
effect on the cost of living (including housing) in that region has been even more marked.
Housing supply is inelastic in the short run. Evidence from Bacon, McCabe and Murphy (1998), updated in the model of the housing market in Appendix 1, shows that it can take a significant number of years to expand output in the housing sector when faced with a sudden increase in demand.13 To achieve the massive increase
in output in the housing sector that we have experienced over the last eight years required a huge mobilisation of resources into the sector in Ireland. Resources, including labour, had to be bid away from other sectors in the economy and from the housing sector elsewhere in the EU. This saw a rise in prices of many inputs and was reflected in big increases in land prices.