Running Out Of Bricks: A Warning Sign For The UK Housing Market

The UK real estate boom has largely recovered from the brief hick-up in 2008-2009, whereby the biggest price increases were as usual seen in London and the counties in London’s immediate neighborhood. As a result, prices have not yet returned to their former peaks country-wide, but in London new record highs have been set.

Currently there is evidently a building boom underway, and builders and real estate investors just received a warning signal (it is an early warning, but a warning nevertheless). One of our readers pointed out to us that recent press reports suggest that there is currently a shortage of bricks and other building materials in the UK:

“Brick stocks in the UK have reached the lowest level on record as merger mania grips the sector. Stockpiles of the vital building blocks dipped to 323m at the end of October, down almost a third from 500m in 2012, after stocks of more than 1bn were recorded in 2009, according to monthly reports from the Department for Business Innovation and Skills, and the Office for National Statistics.

The UK brick sector has seen a flurry of deals recently. CRH, the FTSE 100 building products company, said on December 15 it had agreed to sell its 115-year-old Ibstock Brick business, plus three other divisions, for £414m in cash and debt to US private equity giant Bain Capital. HeidelbergCement announced on December 24 it had sold its brickmaking business for a purchase price of $1.4bn (£900m) to private equity firm Lone Star. Ibstock, one of the UK’s three biggest brickmakers, traces its roots back to 1899 and employs just shy of 2,000 people in the UK.

CRH, led by chief executive Albert Manifold, had been expected to sell its entire clay brickwork business, after appointing investment bank JPMorgan to lead the process.

Martin Warner, chief executive of Michelmersh Brick, said: “Every brick we can make has already been sold up to three months in advance – the UK brickmakers can’t supply demand at the moment.”

(emphasis added)

Not surprisingly, brick prices have risen by 8.8 percent last year, and brick makers are rushing to expand supply.

Inventories of building materials in the UK – via The Telegraph

Why is this a warning sign? Some of our readers may recall the “DRAM shortage” of late 1999/early 2000, which went hand in hand with the final blow-off move in the Nasdaq Index. Such shortages of manufactured intermediate materials are usually a sign that there is excessive demand, driven by overly loose monetary policy. They can also be a sign that there has been a lack of capital maintenance in intermediate stage industries, as too low interest rates encourage both excessive investment in the highest stages of the capital structure, as well as over-consumption. Since capital is scarce, the middle stages of the production structure often suffer – capital has to be withdrawn from somewhere after all.

Conclusion:

A close eye should be kept on the UK housing market – the shortage of bricks may well be a sign that a glut of houses will soon be discovered.