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Credit Crunch Affecting Construction Industry
Credit Crunch Affecting Construction Industry As Britain’s economy continues to cool, effects of the slowdown are beginning to be felt by architects, builders, and even students. The latest economic figures show that the UK economy grew by only 0.2 per cent in the second quarter of 2008 – the smallest economic growth the country has experienced since the first quarter of 2005. Economic experts largely blame the weak economy on the ongoing credit crunch. Largely a worldwide phenomenon beginning in America in 2006, the credit crisis has the potential to have a particularly negative effect on Britain’s economy, which has been so dependent on financial wizardry to thrive. Concerns became clear at the beginning of last month when two large British firms announced serious setbacks; both related to the credit crisis. First, Taylor Wimpey, the country’s largest homebuilder, announced that it was unable to raise the necessary financial capital in order to level its balance sheet. Consequently, the building giant’s market value has fallen 93 percent. As Taylor Wimpey desperately seeks out ways to shore up its balance sheet, it decided to put its contracting arm – Taywood Construction – up for sale. Other economic realities are coming to light as the credit crunch takes hold: Marks & Spencer, the British retailing icon, last month reported falling sales as chief executive Stuart Rose warned of “stormy times ahead.” Consumers are obviously tightening up their purse strings and not spending as much cash on retail items as they once did. Within the housing market this consumer behavior becomes more obvious. Britain is suffering through a dramatic contraction in new home construction as the value of existing homes has dropped. Homeowners aren’t going to sell their home if they can’t recoup their original investment. This behavior has noticeably slowed the new-home construction market. Compounding this consumer behavior is the fact that mortgage finance, once very easy to obtain, has dried up. Rising inflation, coupled with spiraling energy costs, make it difficult for Britain’s central bank to provide credit relief. However, it is the housing bubble in Britain that may be beginning to burst that most exposes the UK’s dependency on the financial industry for a thriving economy. Between the years of 1997 and 2007, home values soared by 140 per cent in Britain, the biggest increase in Europe. Cheap credit in the country created the most heavily-indebted citizenry of any member of the G7. Consumers quickly applied for, and received, credit lines that financial firms should have examined more thoroughly. British mortgage lenders backed these easy mortgage loans with bonds. Over the last nine months the bond market has virtually closed – with disproportionately negative consequences on the British financial market and the housing industry. All is not gloom and doom as construction output has only fallen by 0.7 percent during the latest quarter, but according to the Office for National Statistics (ONS), the reduction was due to a “particularly large” contraction in new home building. Many new construction projects have been put on hold since March as the would-be home buyers search for ways to secure a mortgage and face the reality of selling their old home at a loss, in some cases. During the time period builders have trimmed the employee ranks by 5000 jobs. Students of architecture are also beginning to feel the hit of a negative housing market. Students seeking full qualification are finding that case studies needed for graduation are being shelved, putting the Part 3 architecture students in a difficult situation. About 20 students within the RIBA North West region are already experiencing this. “In the current economic climate it is inevitable that staff at all levels are vulnerable to projects being called off, but already Part 3 students are having to drop out of courses due to case study projects not continuing,” said Pam Cole, chair of the Association of Professional Studies Advisors in Architecture. “A few students working for practices with large housing portfolios have already been hit with redundancy.” The deferral rate for next month’s Part 3 exam is also particularly high at the Manchester School of Architecture. “The credit crunch seems to be having an effect on students getting work – there are more people left looking for work [and] some students have found work only to be laid off.”
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This intel was contributed by MegaDaz
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May, 2012
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