Is construction on the brink of a rebound?

Anyone exposed directly or indirectly to the Irish construction industry will be wary of a prophesy about growth in activity. Of all the sectors eviscerated during the Ireland’s economic collapse, it was construction that hurt hardest. 

Annual house completions imploded from 88,000 in 2006 to just 8,500 in 2012. Average house prices are down almost 50% from their highs, compounding the volume and price effect for the entire sector. Commercial properties were overbuilt and the recession postponed decisions by many companies to any expansion plans.

All of this led to a horrible mixture of falling pay rates for those fortunate enough to keep their jobs. You will, however, find the most direct impact of this collapsed industry in the ongoing and appalling emigration volumes as about 3,000 Irish natives continue to leave Ireland their homeland every month.

A number of factors are relevant in any analysis: 

* The base level of activity is so low that any incremental growth will produce significant year-on-year expansion. Housing starts, for example, are on the floor and below levels needed by the growth in family cohorts. A small rise of, say, 850 units completed would produce 10% annual growth but leave the yearly completion rate at just 11% of 2006 rates;

* Activity levels in the UK housing market is are picking up and is are have been reflected in sharp rises in the share prices of housing companies, including some Irish ones such as the Grafton Group. This is being aided by government incentives but is also propelled by a chronic shortage of houses amid a growing population;

* The IDA has recently warned that the absence of high-quality large volume commercial properties are a threat to developing multinational investment here. How long will it take before a global corporation or two links up with the IDA and developers to fast-track a signature building in one of Ireland’s cities?;

Interest rates remain at record lows. Although the banking system remains stressed, results from Bank of Ireland last week point to an improving, albeit from a poor base, performance. A healthier banking system is likely to stimulate credit expansion, a necessary ingredient for any the recovery in construction;

* Anecdotal feedback from private companies that supply the Irish and UK construction markets suggest an improving if tepid environment for demand and sales.

Construction is a key to element of any domestic economic recovery as because it tends to stimulate local incomes and spending more than the exports of, for example, hi-tech goods or pharmaceuticals. Therefore, finding ways to kick-start it are critical.

However, we can never again allow a cyclical industry such as construction to evolve into an outsized portion of Ireland’s economy (it accounted for 15% of GDP in 2008 and just 5% now). Construction contributes 7% to the UK economy and that may be a more long term sustainable level for Ireland, implying growth of more than 20% from current levels.

The challenge for policymakers is to provide a framework that aids the recovery of construction without overinflating prices or pumping excess volume into the system. A multi-year, yet modest increase in production rates and prices from current levels would be helpful in making construction a valuable input to the health of our economy while delivering incremental new jobs in the process. It would also help instil a sense of stability for the consumers and financiers of construction activity by reducing the extreme volatility that characterised the last decade.

The political system learned harsh lessons from the experience of the past five years. On paper, we now seem set for a better focused strategy for construction within the Irish economy and one that yields a higher quality recovery.

Only time will tell. Joe Gill is director of corporate broking with Goodbody Stockbrokers.