Scottish Government

ANALYSIS OF HISTORICAL CONSTRUCTION COST MOVEMENTS IN SCOTTISH SOCIAL HOUSING FINAL REPORT

7.0 INDEX SERIES COMPARED

7.1 Introduction

Chapters 2 to 6 have separately examined historical trends of Capital Costs, Maintenance Costs, Tender Prices, Output Prices and Management Costs.

Chapter 7 considers how these different measures relate to one another and how they have varied over time.

As previously discussed, the measures of Capital Costs, Maintenance Costs and Management Costs are, to some degree, notional and exclude the effects of market conditions and productivity changes. In contrast, Tender Prices and Output Prices reflect the actual prices paid by building clients and are fully reflective of market conditions and productivity changes.

7.2 Most relevant index series

Each previous section of the report has identified the most appropriate index available as historical measures of cost and price change applicable to Scottish social housing refurbishment and maintenance:

Capital Costs - Scottish Social Housing Refurbishment Cost Model

• specially compiled index by DLE, currently compiled only from 1991 - could be composed back to an earlier date but DTI's Resource Cost Index of House Building (HOCOS) is considered to be a close proxy for earlier years

Maintenance Costs - DTI Resource Cost Index of Maintenance for House Building

• UK index but only maintenance cost index specific to housing

Tender Prices - Scottish Executive Housing Tender Price Index

• Not currently published into the public domain (annual figures are published in Scottish Executive Statistical Bulletin Housing Series) but the index most likely to closely reflect the movement of construction prices relative to Scottish social housing new and refurbishment work. It may slightly understate price increases associated with refurbishment work at times of plentiful workload

Output Prices - BMI Output Price Index for Public Housing Maintenance

• UK index, only available from 1998 but the only price index monitoring the trends of housing maintenance work

Management Costs - DLE Management Cost Model

7.3 Long term trends

Chart 7.1 plots the real change between 1985 and 2002 for

DTI Resource Cost Index of House Building (HOCOS) - as proxy for Scottish Social Housing Refurbishment Cost Model

DTI Resource Cost Index of Maintenance for House Building (HOMACOS)

SE Housing Tender Price Index

Chart 7.1 Long term trends (1985 - 2002)

The chart graphically illustrates the difference between the UK cost indices (HOCOS and HOMACOS), excluding the effects of market conditions and productivity changes, and the Scottish tender price indices (HTPI), which include the effects of market conditions and productivity changes.

Cyclical effects can be observed in the cost index series, declining during the recessionary period of 1990-92, increasing during the expansionary periods of 1992-95 and post 1999. These trends are magnified in the movement of the tender index, which also clearly illustrates the effect of the boom period of 1987-89 and the decline between 1995 and 1997.

Over the entire period, the tender index shows a real price reduction of 4% (average -0.3% per annum) while the cost index series show an overall rise of 3 to 5% (average 0.2 to 0.3% per annum).

The movement of the cost index for new build housing and that for maintenance of house building have been closely matched over the entire study period. Between 1985 and 1997 real costs for new build declined by an average of 0.2% per annum while those associated with housing maintenance declined by an average of 0.3% per annum. Maintenance costs rose at a slightly faster rate than new build costs post 1996 as a result of rapidly increasing wage awards. Overall change in both index series only became positive post 1999 when the higher than inflation wage awards took effect. Refurbishment costs (as evidenced by the Scottish Social Housing Refurbishment Cost Model) have shown the same overall cost movement as the maintenance cost index between 1991 and 2002.

Real changes in the market driven tender price measure have been negative except between 1987 and 1989, 1993 and 1995 and post 1997, when steadily increasing construction workload has resulted in positive real inflation. Between the base date of 1985 and 2002, overall real inflation in the housing (and, by inference, housing refurbishment and maintenance) markets has been negative.

This suggests that, in the long run, despite periods of contra movement, real construction prices decline over time, as productivity improvements outweigh real cost increases, further evidenced by the trend from 1964 plotted in Chart 4.22.

7.4 Medium term trends

Chart 7.2 plots the real movement between 1991 and 2002 of

Scottish Social Housing Refurbishment Cost Model

DTI Resource Cost Index of Maintenance for House Building (HOMACOS)

SE Housing Tender Price Index

DLE Management Cost Model

Chart 7.2 Medium term trends (1991 - 2002)

Over this medium term 11 year period, the real change in the cost movement of the Scottish Social Housing Refurbishment Cost Index has been identical overall to that of the generic DTI Cost Index of Maintenance for House Building. Management costs, as portrayed by the movement of the DLE Management Cost Index, have followed a very similar pattern over this period, though running at a slightly higher overall trend, rising by 1.2% per annum as opposed to 1.0% per annum for the construction cost measures.

Over the longer period, from 1987 to 2002, the real increase in management costs has considerably exceeded the increase in all the construction cost and price measures, rising 24% compared to an increase of 7% in maintenance costs and a 1% fall in housing tender prices. This is because management costs have risen steadily since the base date whereas construction cost and price measures fell in real terms between 1985 and 1991. Growth in real earnings of non-manual workers generally increased by 2.8% per annum between 1985 and 1992 in Great Britain (2.3% per annum in Scotland), a higher annual real inflation rate than even the latest 1997 to 2002 period.

None of the construction cost or management cost trends reflect any changes in productivity over the period.

Similarly to the Long Term Trend analysis above, the Housing Tender Price Index portrays a very different pattern of movement, compared to the cost index series, over this shorter time period, showing a total 0.4% real price reduction overall; this compares with overall rises of 11.9% for the refurbishment and maintenance cost index series and 14.3% for management costs. These trends indicate the response of the market to differing market conditions and, by comparison with the construction cost measures, improvements in productivity that have occurred.

Effectively, over this medium term 11 year period, real tender prices in Scotland have been virtually flat.

7.5 Short term trends

Chart 7.3 plots the real cost and price change between 1998 and 2002 of

Scottish Social Housing Refurbishment Cost Model

SE Housing Tender Price Index

BMI Output Price Index for Public Housing Maintenance

DLE Management Cost Model

Over the most recent four year period, the four measures examined, housing refurbishment costs, housing tender prices, maintenance output prices and management costs, have all shown very similar real increases, between 9.4% and 10.7% overall (average 2.3% to 2.6% per annum).

This is the only period examined where management cost increases have been exceeded by construction cost or price measures. Over this short period, price measures (both new build and maintenance) have risen fractionally faster than the underlying cost measures. Over this short-term period, productivity improvements (in both new build and maintenance) have failed to counter real increases in prices, which have been mostly the result of above inflation wage increases in the industry.

Chart 7.3 Short term trends (1998 - 2002)