Main Factors Which Determine the Demand for the Construction of Built Facilities and Outline How These Factors Have Operated on This Demand in the Last Two Years - Inflation Essay Example
TITLE OF THE DOCUMENT IDENTIFY THE MAIN FACTORS WHICH DETERMINE THE DEMAND FOR THE CONSTRUCTION OF BUILT FACILITIES AND OUTLINE HOW THESE FACTORS HAVE OPERATED ON THIS DEMAND IN THE LAST TWO YEARS - Main Factors Which Determine the Demand for the Construction of Built Facilities and Outline How These Factors Have Operated on This Demand in the Last Two Years introduction. The determination of demand of goods and services produced the construction industry is a complicated process. This is partly due to the cost, size, longevity and investment nature of the and partly due to the broad range of what constitutes construction activity. It is difficult to envisage just one housing market (Danny Myer, 2004). Factors affecting built facilities construction demand can be categorised as general and local factors.
General factors are political, economic, social, and technological and legal/legislative based. Local factors include a combination of building types, procurement types and geographical location (Akintoye et al, 1994). The consensus in the construction industry is that the interest rates and general business confidence have the greatest bearing on the private sector workloads (Beard Dove, 1991). Hillebrandt (1985), however, has extended this to the following list of general leading indicators of construction demand; 1. Population 2. Interest rate 3. Shocks to the economy 4. The demand for goods 5. Surplus manufacturing capacity . The ability to remodel 7. Government policy (monetary, fiscal, e. g. tax policies) 8. Expectation of continued increased demand (for manufacturing goods) 9. Expectation of increased profits (on the activities of those that demand construction) 10. New technology These factors have been investigated as the potential leading indicators of the USA construction demand (Akintoye, 1994). For the UK, the general factors of construction demand are grouped into the following: economic conditions, construction price, real interest rate, unemployment level, and profitability (Akintoye, 1994) ECONOMIC CONDITIONS
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Construction of new built facilities is considered to be a major investment which adds value to the Gross Domestic Product (GDP) of a nation (McConnell et al, (2009). A single indicator of economic conditions is national income. Among other factors, the quantity and to some extent quality of construction demand is dependent on the national economy. There is a relationship between construction demand and the growth in GNP, as a measure of the economic wellbeing of a nation (Hutcheson, 1990).
The mechanism for this is thought to be that the demand for construction work is derived from the demand for consumer goods. A period of economic prosperity tending to raise consumer demand for goods and services which, in turn, triggers up the demand for construction space. In the last two years the economic conditions have acted in the built facilities construction demand. The effects of the recession which engulfed the World economy also affected all aspect of the UK national economy. In December 2008, the construction sector shrank at its fastest since records began (The Times 100).
The most considerable Decline was registered in the house building, while the civil engineering and commercial sub-sectors also fell at records rates during that month. This has led to the expectations that the Bank of England will cut the interest rate following its two day meeting during the 5th January 2009 to reduce borrowing costs to the lowest level in its 314 year history (Times Online,5 January 2009). As well as the decline in housing construction sector, the housing market has also slumped. According to the Halifax, houses prices fell 16. % 2008, the biggest annual decline since it began keeping records in 2003( BBC news, 2 January 2009). But after the world financial crisis passed, the construction industries have been recovering for some time with an estimated output growth in the second quarter of this year was 6. 8%. This table was outsourced from Brickonomics. building. co. uk, as shown in the table; the output of the construction industry has been declining since March 2008 until at around June 2009 when the recession was at its peak, and started rising by July 2009 and went down by September 2009 until March 2010 when it started rising to this date.
CONSTRUCTION PRICE The relationship between the price and the commodity price is a recurring theme in the economic literature. McConnell et al (2009) shows that the price levels of a commodity are dependent on the demand of that particular commodity. The construction industry also follows the same model; the construction price levels are dependent on the demand for construction. It is also suggested that a fluctuating demand for construction leads to fluctuating prices and vice versa suggesting that the demand for construction may depend on the relative price of construction.
A common measure of trends in price in the construction industry is the tender price index, which measures the treads in the cost of construction to construction clients and reflects the trend in the accepted tender prices. Therefore we can say that the construction price of built facilities determine the demand of the built facilities, because when the price goes down the demand goes up. REAL INTEREST RATE Real interest rate may be used as a proxy variable for credit market conditions (Akintoye et al, 1993). he cost-of living indices or consumer price index that provides a rough estimate of changes in prices are incorporated into interest rate to arrive at real interest rate as a measure of credit market conditions for the investors. Investment in construction is most likely to be financed from loan credit or organisation profit; hence real interest rates constitute an important cost factor in construction. Even where investment is financed from organisation profit, interest rate is still an element in the decision making process as the return from alternative investments such as fixed interest bearing securities may be very attractive.
The real interest rate also reflects an unobserved variable -the real cost of funds. In this sense a rise in the real cost of funds may be implied as a result of the rise in nominal interest rate and fall in inflation. This rise in the cost of funds is likely to cause a declining capital investment unless offset by other economic variables such as a fall in real investment prices and cuts in taxes. UNEMPLOYMENT LEVEL An increase in unemployment or even a declining rate of growth of employment in an economy may discourage investment in construction.
This is due to the linkage between construction demand and the total purchasing power of the population. There is a need to include both the ability and willingness to pay in modelling demand for capital investment. Ability to pay is often taken to be represented by an income variable. Increases in unemployment may raise the level of financial uncertainty among potential investors in construction and cause them to defer or abandon investments with a resulting decrease in total new construction volume (Akintoye et al, 1994).
For the last two years, because of the recession; more jobs were lost in all sectors of the economy including the construction sectors, this made it difficult for the construction companies to continue working because of the lack of cash flow. As thus the demand of the construction of built facilities went down as there was no enough manpower to continue the construction works. This graph shows that since January 1998, unemployment has been rising until last year between March 2009 and July 2009. It is outsourced from http://seekingalpha. com PROFITABILITY
The manufacturing price/cost ratio could be used as a proxy for the profitability in view of the general importance of the manufacturing industry in the private sector general consumption pattern. The importance of the manufacturing sector is recognised by Akintoye et al (1994) regarding surplus manufacturing capacity and expectation of continued increased demand for manufacturing goods as they affect construction investment. Therefore, high profitability in the manufacturing sector may encourage investment to enable increases in production.
This may affect the construction industry either directly as capital investment in new buildings or indirectly as increased pay to personnel and increased returns to shareholders, encouraging increased spending on housing or other forms of construction works associated with private sector. The construction have suffered a lot in the past two years mainly because of the recession, the profitability of the construction companies went down and as thus no construction company wanted to make a loss. This lead to a decline in the construction demand.
In addition to the above factors, demand of the construction of built facilities is also determined by the following; 1) THE NATION’S AGEING INFRASTRUCTURE The aging of the existing built facilities have increased the demand for the construction of the new ones, the old buildings are being demolished to give space to the new ones. In the past two years, the old buildings in the UK have been demolished and giving a way for the new ones. 2) THE NATION’S GROWING POPULATION Due to an increasing population, more built facilities are required to accommodate all the people and the services they will require.
The health care, public safety and education will help prop non-residential construction. In the past two years, from 2008 the health care construction increased by 42% through 2011. This is driven by the population that is an increase in the aging population and retirement of baby boomers and increased birth rates. In the public safety sector, the number of inmates entering the penal system is much more than the number of the inmates being released resulting in overcrowding, to prevent this new building facilities are built to accommodate them.
The education sector also contributes, due to the increase in the university and college enrolment, more facilities are required to accommodate them. 3) UPCOMING OLYMPICS GAMES The expected 2012 London Olympics also have been contributing to the demand of the built facilities in the UK, construction have been taking place to prepare for them. The official bill for the Olympic venues, infrastructure and regeneration is currently almost ? 5 billion. The huge demand for construction that this represents will have knock-on effects in the wider construction industry, pushing up construction inflation each year until the Games have been held.
EC Harris, a leading construction consultancy, estimates that the Olympics will increase annual construction tender price inflation in London and the South East by 1 to 1. 5 per cent. For new construction orders in London and the South East, which are expected to reach well in excess of ? 10 billion by 2012, this will mean substantially higher prices for buyers. The 2012 Watchdog calculates that if the Olympics add 1. 25 per cent to construction inflation (the midpoint of the EC Harris range) each year between now and 2012, the increased cost of construction orders attributable to the London Olympics will reach ? 3. billion in total. The ? 3. 9 billion total is not an annual figure, but is the sum of the increased construction costs each year between 2007 and 2012. The increase in construction costs between now and 2012 attributable to the London Olympics will be felt in a number of areas. The 2012 Watchdog calculates that the Olympics will have the following effects for the different categories of construction order: – ? 1. 5 billion increase in the cost of private commercial buildings, new office and retail space. – ? 921 million increase in the cost of building private housing, potentially adding to house price inflation in the Capital. – ? 40 million increase in the cost of public buildings, potentially affecting plans for new schools, NHS units and GP surgeries. – ? 444 million increase in the cost of infrastructure work, without factoring in large potential projects such as Cross rail. – ? 237 million increase in the cost of building public housing during a critical period when projects for new social housing in London will be agreed. – ? 161 million increase in the cost of private industrial buildings In conclusion it can be said that the construction demand of built facilities is determined by a lot of factors as outlined above and in different ways in the past two years.
One factor that mainly affected that construction demand in the last two years is the world economic crunch, it shrank the demand badly. REFERENCES 1. Akintoye, Akintola and Skitmore, Martin R. (1994) Models of UK Private sector quarterly construction demand. Construction Management and Economics 12(1) :pp. 3-13 2. Myers Danny, (2004) Construction Economics- a new approach, New York ; Spon Press 3. McConnell C, Stanley B, Sean F (2009) Economics,18th Ed, New York ; McGraw-Hill 4. Brian Green, 2010, Construction industry is ? billion smaller as official growth rate is trimmed , 12th November 2010 ; Available at: < http://brickonomics. building. co. uk/2010/11/construction-industry-is-1-billion-smaller-as-official-growth-rate-is-trimmed/ > accessed 15th November 2010 5. Seeking Alpha, 2010, Chart of the Day: Unemployment Claims Back to Pre-Crisis Levels, March 25 : Available at: < Http: //seekingalpha. com/article/195668-chart-of-the-day-unemployment-claims-back-to-pre-crisis-levels/ > accessed on 22nd November 2010 6. Peter Stiff, 2009, UK construction activity slumps to record low, Times Online[online],