Overview of Industry

Construction Activity Report 2007

2007 was the year in which the various sectors of the construction industry diverged from universal growth for the first time in many years. It was also a year of ministerial promises not to reform stamp duty, followed by reform of stamp duty. It was a year which saw the world’s first Carbon Budget and a decline in new housing starts which confirmed 2006 as the high-tide mark for the value of construction activity.

Employment in Construction

Over the past twelve months, employment in construction has risen by some 4,800. This is despite a marked slowdown in the commencement of new housing projects and a tightening economic environment. Of the 282,600 people who are direct workers in the construction sector, 245,000 are Irish nationals. Over the last twelve months, over three thousand Irish workers found employment in the sector.

Residential construction is widely recognised as the most labour-intensive form of construction activity. With further slowdowns in housing starts and completions forecast for 2008, it is likely that employment in this sector will also fall. One significant factor which reduces the ability of the industry to forecast the number of job losses in residential construction work is the continued expansion of residential repair and maintenance projects. Already there is significant evidence of workers moving from the new housing industry to home improvement schemes. This, and continued commercial and industrial building growth, will undoubtedly offset much of these job losses, but it is likely that overall construction employment will fall by as much as 28,000 in 2008, bringing it back to mid-2006 levels.

One fifth of employment takes place in Greater Dublin. This reflects the continued diversity in all forms of construction which took place in the capital in 2007. Over 2007, the South-East region has seen the most rapid increase in employment, while outside of Dublin and the South East, job losses in the latter half of the year have almost negated the increases which each region saw in the first six months. It is important to remember that these figures refer only to direct employment in construction. Another 113,000 people work in industries which serve the construction sector.

The most rapid growth in employment opportunities for professionals in construction has been amongst architects, quantity surveyors and civil engineers. The average rate of growth in these professionals has been around 13% per annum over the last five years. In 2007 this level of increase has declined, and is likely to do so again in 2008. The industry has benefited from the increased European skill-pool, and currently around 12% of architects and 7% of quantity surveyors are non-Irish nationals. This has increased the capacity of the industry to deliver national and local property and civil engineering projects.

Residential Construction

In mid-2005, CIF warned that 2006 would be the high-tide mark for new housing output, and that 2007 and subsequent years would show a much reduced rate of housebuilding. This forecast was proven to be correct. In 2006, the industry completed 86,000 houses and in 2007, it completed 78,027. Much to the chagrin of many commentators who expected a very sudden drop, this reduction was less marked than many had forecast. It must be noted that this full-year housing output figure masks a more significant downturn in the number of commencements which will not appear in any official data until later in 2008. The volume of new housing output in 2007 was down by around 13.3% on 2006, offset slightly by a 3.7% growth in repair, maintenance and improvement (RMI) work.

As noted earlier, while 2008 is expected to see a further reduction in new housing output (perhaps by some 60% on 2007 levels) the growth in residential RMI work will increase from 3.7% in 2007 to 7.9% in 2008 and 10% in 2009. A 3% growth in public housing will also contribute, albeit in a very minor way, to limiting the decline in volume of housing this year.

There is widely acknowledged to be a demand for some 60,000 houses per annum over the medium term. A question which is currently occupying the minds of commentators is the point at which that level will be reached. It is likely that while 2008 will see further significant reductions in the production of housing to perhaps 45,000, a plateau of supply and demand will be achieved in 2009. From that point, ensuring a stable supply of new homes in the right location will be the main priority for the industry.

Public Housing

State provision of housing is worth around €1 billion to the industry per annum. In 2007, the volume of public housing projects grew marginally by around 0.5%. In Budget 2008, the Minister for Finance outlined a total housing package of €2.5 billion for the next twelve months to fund the commencement or acquisition of 9,000 new social houses and 5,500 affordable housing. The central capital exchequer funding for 2008 will be some €1.7 billion.

Private Non-Residential

Commercial and industrial development continues to grow, matching the steady growth of the Irish economy. Unlike the residential property sector, there was no reform of the taxation regime on transactions of commercial property in December’s Budget. Nonetheless, the construction of private non-residential property grew by nearly 29% in 2007, and with continued investment in infrastructure serving as an incentive to private sector investment, the full-year forecast for 2008 is for 5% growth. The currently high levels of commercial stamp duty, plus the increased difficulty in securing financing, means that the volume of sales and construction may be reduced in the first six months of 2008, and it is only in a full-year analysis that such growth will be evident.

The impact of the Building Energy Rating legislation, which comes into effect in the middle of 2008 is an unknown quantity and may mean that development takes place within the second half of 2008 leading to lower than expected growth in the first few months of the year. The volume of transactions in hotels and office accommodation was very strong indeed in 2007, reflecting the shortage of good quality, well-located hotels in Ireland, and the development of the regional cities. Given the slowdown in financing and threats from lower levels of US tourism, a significant number of hotel construction projects have been held over into 2008.

Public Sector Construction

The National Development Plan was launched in January 2007, and covers the period 2007 – 2013. It is apparent that the anticipated slowing of public sector construction projects as the new NDP generated momentum has not taken place. Public sector building projects grew in volume terms by 32% in 2007. This was significantly aided by the continuation of the Government schools and hospitals building programmes. In 2008, the growth in volume of public building will moderate to 15%, which is likely to become the normal growth level over the remainder of the NDP. Of course, capital investment in building is ring-fenced by the NDP and the Public Capital Programme, and we anticipate that the further funding for schools and hospitals which was unveiled in the December Budget will be spent within 2008.

In terms of civil engineering projects, the national roads programme and the water services infrastructure programmes continue to provide funding for these much-needed capital projects. The volume of productive infrastructure grew by only 2% in 2007, but we forecast growth for 2008 to be in the region of 10%, reflecting the new capital projects in the 2007 – 2013 NDP.

Conclusion

In previous annual reviews, CIF has monitored the continued growth in all sectors of activity. In 2007, however, growth continued in all but the new housing sector. This is in line with industry expectations and reflects the changing nature of the Irish economy. Continued growth in the non-residential sectors are expected as the economy grows, but external threats to public funding through reduced taxation receipts, and the difficulty in obtaining credit for private investment may mean that forecasts are revised downwards. Ireland, of course, is not alone in being subject to such global changes. It is unfortunate for Ireland that such external threats have taken place at the same time as the peak in new housing output has passed. For that reason, the value of construction activity in 2007 was some €37bn. In 2008, it is likely to be significantly higher than 2005 levels of output, but moderating from the high-tide mark of 2006.

Dr Peter Stafford

Research and Policy Development Executive

January 2008