If you’re operating in the private housing repair, maintenance and improvement (rm&i) sector, worth £15 billion per year, it’s vital to understand what drives it especially when, as in the financial crisis of 2008/09, work in the sector fell 13%, around £2 billion. As an economic forecaster, what we’re essentially trying to do is find some early indicators so firms can prepare business plans for the year(s) ahead.
Private housing rm&I covers thousands of relatively small jobs; everything from fixing a boiler or replacing a window to a loft conversion, conservatory or extension. There are no new orders data so economic modelling can be of great use.
The point here is to establish a relationship between activity in private housing rm&i and the wider economy, variables that are easy to measure, early indicators. Given that private housing rm&i is primarily done by homeowners, we use variables that are related to the sources of finance for households (which enable the private housing rm&i spending) and then incentives for the spending.
Our model (red line) explains 87% of the change in private housing rm&i (blue line) over time using property transactions, car registrations, house prices and the savings rate. A 1% increase in property transactions leads to a 0.8% increase in private housing rm&i three quarters later. Essentially, 6-9 months after a property is purchased, you have rm&i work on the property.
House price inflation (representing wealth) and savings are the sources of finance for rm&i work. So, it is not a surprise that the coefficient is negative as it is using wealth and savings that enables private housing rm&i expenditure.
Car registrations need some explanation. It obviously does not have an impact on private housing rm&i activity. It is what we call a proxy variable. It represents something we can’t directly measure, in this case household expenditure on large, big-ticket, items. Car registrations picks up expenditure that, when there isn’t much money around, may be just essential repairs and general maintenance to keep things going, whether for your car or home. And when the economy is reasonably good, finance is available and people feel relatively safe in their job, a person may purchase a new car. Or do significant improvements work.
The model predicts growth in private housing rm&i over the next four years; 2.4% in 2015, 3.2% in 2016, 2.4% in 2017 and 2.2% in 2018 due to rises in property transactions and house prices, albeit at slower rates than previously and falls in savings rates as both UK economic activity and consumer spending rise.
The model can’t take account of changes in government policy on the economy such as the Green Deal but it is a good guide to the direction of travel for the sector. Since the model predicts growth over four years, it will be interesting to look back after 2018 and see whether the model actually predicted what happened…
Guest blog by Noble Francis, Economics Director at The Construction Products Association
With a Masters Degree and PhD in applied economics, Noble has over 10 years of experience producing economic forecasts. As Economics Director of the Construction Products Association, Noble has overseen all the Association’s economic publications including the Construction Industry Forecasts that have featured regularly in the Financial Times, in addition to radio appearances on the BBC Radio’s Today programme and television appearances on BBC News and Sky News. He also writes a regular column for Construction News in addition to an Economist’s Blog for Building magazine.