Identify three key economic principles and use examples to discuss the extent to which these principles influence and underpin the work of the BS practitioner. Building surveyors are a key asset in the construction industry and need to be well positioned and have an overall view of all economic factors that influence the construction industry in order to fufill their roles. We are going to look at key economic factors that affect their jobs and the construction industry. The UK economy is a very complex model and the work of a building surveyor can be greatly influenced by the state of the economy.
In the UK, construction accounts for about 7% of the national output and can be used as a good indicator for the overall state of the economy. Knowledge of future demand for products and services is vital in the construction industry. Construction contractors will need knowledge of changes in demand for their services in order to anticipate pricing strategies over the coming year, with how many houses they need to build and supply. The earlier the contractor knows of likely changes in demand and supply the better they are placed to take strategic action to achieve maximum profits.
There are many factors that affect the level of demand in construction. Price being one of the important variables. If prices are too high consumers will be put off as they won’t be able to afford the houses and both demand and supply would fall. Expectations of future price increases would also increase demand as people would start panic buying. This would lead to increase in demand for houses and greater construction. Income and expectations of change will affect demand. If incomes are rising then demand for privately owned housing will go up.
People’s living standards will rise and there will be more demand for bigger and better houses. This will mean there will be a boom in new houses and increased construction work as a result. Future expectations and levels of confidence are another factor that can affect demand or supply in the housing market. If the economy is at an uncertain period then people are less optimistic about their own finances and will not gamble by investing in a new house. Currently the UK construction Industry is in a period of prosperity, as a result property owners are encouraged to either improve their property or to invest in others.
This leads to further investment in construction and greater profits. Interest rates and expectation here also affect demand for housing; if interest rates are high then borrowing would be more expensive as mortgage payments would be greater. This will discourage potential first time home buyers as it maybe cheaper for them to rent on there current levels of income. High interest rates would mean a decrease in demand and low interest would increase demand for housing. Demand and supply also affect how the construction works.
Two vital supply variables are labour and building materials. Higher demand in construction leads to wage inflation in the industry, but an increasing supply of workers from Eastern Europe have held back labour wage inflation. The main factors that can really influence the cost of a building project over a year are material costs. Global demand for commodities such as oil and energy are soaring and this is having huge impacts on the construction industry as many industries such as cement manufacture and clay brick manufactures are highly energy intensive.
If they experience higher overheads the price of there goods will fluctuate over a period of time. So predicting wage fluctuations and material costs becomes very difficult over a one year period due just some of these market variables. This means that the building surveyor will have to judge very carefully all these factors and draw up construction cost schedules as accurately as possible in order to remain within a certain budget that contractors may have.
When the UK economy is at a peak, the prosperity means that the local authorities and government would also be advised to initiate major building projects. A recent example of a major project increasing demand for new building’s and development is the London Olympic Games, where tender prices have risen 4-5% just in 2006 as Olympic expectations build. When the economy is at a trough less investment goes on in the construction industry. Demand for building projects decreases, house prices decline and government investment also decreases.
Since the late 1990’s the UK economy has experienced boom and bust cycles and this has directly affected the construction industry and housing industry At periods of high demand, houses are selling at increased prices and new developments are always taking place to cater for the demand. Building surveyors need to be in touch with market forecasts and all economic factors if they are to advise clients correctly. Market structure of industry referrers to the amount of competition that exists. The structure can vary from many buyers and sellers as in perfect competition or to just one sole dominator as in a monopoly.
The Construction market is one of monopolistic competition, where there are many buyers and sellers. Construction firms are not the only sellers and therefore can not dictate the price in the whole market; otherwise buyers can go to other firms as most goods here are of very similar nature. i. e. a house. There is also perfect knowledge in the market meaning that consumers and producers have perfect knowledge of prices and products, therefore any one firm can not alter their prices as consumers will go else where. The last characteristic of firms in the construction industry is that there are no barriers to entry or exit.
This means that there is nothing from stopping a new competitive firm setting up. This would have direct affect on prices as there would be increased competition in construction and house prices or tender prices for projects would decrease. Another type of market structure is of a monopoly. Here there is a single supplier or a supplier that commands over 25% of the market share. In a monopoly the producer dominates the market and controls both price and output. Monopoly market structures are formed when a firm has a unique product, has a government backing which only allows it to be the sole producer or has a patent on a product.
If a monopoly is supplying materials to a building firm it can reap benefits in the form of fewer costs. A natural monopoly can take advantage of economies of scale. This is because it is such a large producer of a product that it can cut costs due to large scale production. This means that construction costs can be reduced for building firms. On the other hand a firm that is a monopoly does to strive to innovate, where as a small firm striving to prove themselves will produce new products and make best use to technologies in order to produce cheaper and new products that may attract new customers.
The UK construction industry can be used as a good indicator for the condition of the overall economy. If demand for houses is low then demand for construction is also low. This is high or low demand is mirrored by the whole economy. It is clear that a building surveyor’s role is affected directly by economic factors as peaks and troughs of the economy are reflected by highs and lows in building surveyor’s workloads as well as important decisions they make when it comes to building projects.