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Anti-Immigration Politics Make Labor Shortages Worse for Builders

Posted by Mike Collignon

Oct 18, 2016 8:35:01 PM

Britain’s Brexit-induced labor woes suggest that similar policies in the U.S. would hurt the industry.

IF YOU PICKED UP a newspaper, read news headlines on the Internet or even visited any social media channels near the end of June, you probably heard about Brexit—the British exit from the European Union. While the pros and cons have been discussed ad nauseam, what hasn’t received much coverage is the effect on the homebuilding industry.

Brexit

 In June, 52 percent of British voters chose to leave the European Union. It’s unknown how the move will affect construction and other industries. 

The homebuilding industry in Britain relies on skilled labor from the European Union. Though nearly half of homebuilders in the U.K. do not think Brexit will affect their business’s ability to recruit skilled labor, 27 percent reported labor to be the biggest factor restricting the amount of homes they can build, according to Propertyweek.com.

The U.K.’s version of National Association of Home Builders is called the Home Builders Federation (HBF). Exactly four months prior to the Brexit vote, an Inside Housing article quoted a spokesperson for the HBF as saying: “While the industry is recruiting heavily and training thousands of young people, it does currently rely on skilled labour from abroad. If it is to maintain the significant increases in output of the past two years, it is imperative it has access to an adequate supply of labour. In the event of us leaving, we would certainly be pushing government hard for guarantees that sufficient skilled foreign labour would be accessible.”

While one would expect a diplomatic answer from an industry association, the Inside Housing article quoted unnamed house builders who were more direct with their words.

“The most concerning thing would be continuing to have access to a good supply of labour, which has been the most inhibiting factor and remains the most inhibiting factor for the industry,” said one anonymous senior executive. Another added: “I think it’s extremely unwelcome. My immediate concern is that there could be a prolonged period of uncertainty, which will hit every aspect of manufacturing. The longer term impact is that it will potentially cause issues around skills and the availability of labour—which is a big problem, anyway.”

Labor

Because Britain relies on migrant construction workers, the country faces the possibility of a more severe labor shortage.

Migrant Workers

The Federation of Master Builders (FMB) is another trade association in the U.K. They’ve urged the government “to not turn off the free-flowing tap of European migrant workers” if the U.K. wants to meet its house-building and infrastructure goals. The U.K. Housing Minister stated in 2015 that the government wants to average 200,000 homes built annually over the next five years. There were 139,680 homes started in 2015, according to the Department for Communities and Local Government. To increase the number of new housing starts by 43 percent seems unrealistic, even before the exit vote. Now, it might be impossible, according to the article.

FMB said 12 percent of British construction workers are of non-U.K. origin. A MarketWatch.com article reported: “The majority of these workers are from E.U. countries, such as Poland, Romania and Lithuania. They have helped the construction industry bounce back from the economic downturn, when 400,000 skilled workers left the industry.”

Up until now, the lack of manpower has driven building costs up for U.K. house builders. Simple economics tells us that a further reduction in labor force will lead to an increase in demand and labor costs. The MarketWatch article states this is happening in a country where masons already earn up to £60,000 (more than $87,500) per year in London, and £45,000 (over $65,500) in rural Northern England.

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Economic Impact

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Builders reporting a labor shortage have risen to 46 percent in 2014, 52 percent in 2015 and 56 percent in 2016, according to a report by the National Association of Home Builders.
As if the news wasn’t bleak enough, financial services firm Canaccord Genuity said “other risks the sector could be facing are the rise in unemployment, the negative macro shock on U.K. gross domestic product and a sharp fall in net migration might affect future household formation trends.”

Only the largest homebuilders are publicly traded, but they are also the companies that move the larger market. How did they fare after the vote to leave the E.U.? So far, things have not been good. According to an article on MarketWatch, the day after the vote was one to forget. The market open saw builder stocks plummet by double digits. As the day progressed, there was a bit of recovery, but the day ended with sizable losses. But what’s happened now that the market has gotten past its knee-jerk reaction? The table above speaks for itself (the prices are in pence). While it is true all five stocks are up from their lowest price, the best-case scenario on this table is a 21.4 percent reduction in value a full six weeks after the vote.

Believe it or not, there is a bit of good news. Canaccord Genuity felt “the sector is in good shape, in terms of having strong balance sheets and showing capital discipline.” Barratt Developments PLC, the biggest U.K. house builder by sales, felt the way to navigate the turbulent times was through quality. “There is a structural under-supply of quality homes in the U.K., and we have a clear strategy to address this,” Barratt says.

U.S. Conditions

Over here in the United States, the concerns about labor shortages are echoed by American homebuilders, as are the statements about access to capital. Stock prices directly affect a small minority of homebuilders, but indirectly affect millions of people’s portfolios. This November, the United States obviously does not face the same decision as the U.K. did recently. But as the saying goes, if we don’t learn from history, we’re doomed to repeat it. There may be policy lessons that can be learned from this historic decision by one of our strongest allies. 


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