Demand and Supply of British Domestic House Building - Research Paper Example

British Building and Construction Industry: Domestic Housing Building BS1106, Business Environment, January 6, 2006 Index I. Introduction II. Market Structure a. Porter’s Five Forces Model b. Consumer Behaviour III. Determinants of Demand IV. Determinants of Supply V. Factors Influencing the Market a. Social/Technological b. Political c. Economic d. Environmental e. Legal VI. Analysis VII. Conclusion VIII. Appendix Table: Total Economy ‘Analysis of Broad Sector and Type of Assets’ IX. References I. Introduction Economy of UK is one of the world largest economies. The UK was worth £5.3 trillion at the end of 2003. Housing represents over £3 trillion of these assets. UK attracts number of people from all over the world with a good job and living perspectives1. House is one of the basic needs of any person. The increasing populations of migrants along with the existing population have already got attention from economists, industry experts and government. As we know British Building and Construction Industry contributes 10% of its GDP. It is fulfilling the demands of infrastructure in a very competitive environment. This paper starts with understanding this market. Here we will discuss about Porter’s Five Forces Model and try to understand the kind of customers marketers have in the domestic housing sector. This section would be followed by the discussion on determinants of demand and supply in the housing industry. Once we have understood the market structure and supply-demands we will be discussing various factors like economic, social, legal and environmental which affect the industry. This will be followed by the analysis and conclusion. II. Market Structure Constructions output at current prices is £102.4 billion, the latest figures compiled by the Department of Trade and Industry show. One in 10 people employed in the UK work in construction and 1.68 million work for contractors (DTI: Apr 2004) 1.05 million of which are employees. The industry is made up of around 192,404 construction firms, 164,000 of which have less that 24 employees. Just 56 firms have more than 1,200 employees. (Source: Construction Statistics Annual 2002/CITB). 2 We will try to understand this market through Porter’s five forces model. We will try to understand the attractiveness of the industry with the help of Porters Five forces Model.3 a. Porter’s Five Forces Model Industry Competitors (Segment Rivalry): There are around 192,404 small and big firms. 56 firms have employed more than 1200 employees while 28,348 firms have employed 25 or more than 25 people and rest 164,000 firms have employed less than 24 people in their organization. Around 500 firms work for overseas contracts also.4 The segment rivalry and exit barriers are high. Suppliers (Suppliers Power): As it is almost mature industry in Britain, the number of suppliers and rivalry among them is high. This gives an added advantage to the constructor to negotiate for the quality and the price of goods supplied by them. The switching cost from one supplier to another is usually high. Buyers (Buyers Power) Buyers’ power in the case of houses is limited. There are several reasons for this i.e. increasing demand of house, lesser number of buyers, buyers not connected to each other, lack of information and others. Threat of Substitutes The threat of substitutes is less and within the category. Housing requirements of an individual or family can be very specific leaving no room for many or instant substitutes. It depends upon the quality, price and availability of the house. Potential Entrants The capital requirement, expertise, knowledge of the field required is high in this industry which acts as a barrier for the new entrants. Figure 3.1 Porter’s Five Forces Model b. Consumer Behaviour The consumer behaviour can be divided on the basis of the type of consumers. They can be divided on the basis of income group, age, sex or numbers of factors are there on the basis of that we can segment the consumer. Consumer need and preferences are highly related to his/her income and the social group. There are some groups which has been ignored during the process of progress like low income group, elderly and renters. The involvement of customer to the purchase of house is high. Sentimental and emotional values are high for selecting the right house. People do spend lot of time, money, energy and other resources for the search of right house. . III. Determinants of Demand a. Tastes and Fashions Usually this has less influence or minimum influence on the demand of house. The reason for it is the high cost involvement, high involvement of individual and availability of the houses. b. The number and price of related goods (Substitute/Complement) Numbers of available houses, rental rates, tax structure etc have impact on this e.g. if the Rental accommodation is the substitute for the own accommodation. If people feel that the rent rate is almost equal to the installments they would be paying if they buy house the decision to buy house becomes stronger increasing demand. c. Income When the income raises demand for goods and services rises. This is same in the case of house as well. A person can think about buying house when he has sufficient savings after fulfilling his basic requirements. d. Expectations of future price changes If the prices of houses/rental rates are going to increase people will try to buy the house before that period starts. e. Population Demand of houses is directly linked with the population. The growing number of immigrants and concentration of population in a certain geographic location will increase the demand of the houses in that area. If the supply is less, the prices will go up. IV. Determinants of Supply a. Costs of Production Cost of the land, wage rates, availability of technology, prices and availability of construction material and government policies are some of the key factors. b. Profitability of alternative goods in supply If the constructor gets better profit margins in giving consultancies than building a house he would do than. c. Nature, random shocks This includes the factors beyond the control of the marketer. These are natural disasters like earthquake, change in government policies and industrial disputes etc. d. Expectations of future prices If the prices of the houses are likely to grow, manufacturer may hold some of the houses to get more profit later. e. Profitability of goods in joint-supply The house can be fully furnished and the builder can charge extra for that. V. Factors Influencing Building and Construction Industry There are various factors as mentioned in the Fig. 5.1. The social factors decide the level of importance of having own house. It will also show the need for any particular class of the society. At present the aging population of baby boomers and their specific requirements are one of the areas of concern. The economic factors influence the overall purchasing behaviour and the prices of the goods in the market. Higher the growth in the overall economy, higher will be the opportunity of employment and earning possibility. This will have direct impact on the buying pattern. Figure 5.1 Factors Influencing Building and Construction Industry VI. Analysis If we see the Table there is approximately 17% growth in the new dwellings and at the same time the percentage growth in the construction of other buildings and structures was approximately 9.5%.5 The GDP growth on a 12-month basis stood at 1.7 percent (3rd quarter) 2005. There is slowdown seen in the growth recently. This has become one of the issues of concerns. The GDP last year was 3.1%. The downturn in the growth of GDP and increased level of inflation impacts the demand supply curve. The disposable income will go down, prices of things will increase result in lowering the demand and supply of the houses. Figure 7.1: Supply Demand Curve: Increased demand pushes the price.6 VII. Conclusion London’s 2012 Olympic bid win gave a huge psychological boost to the capital, but can the UK’s construction industry deliver the games on time and to budget?7 As stated in the above, in the present scenario when the Olympics 2012 will be hosted by London, it has given an enthusiasm to overall economy. Pressures have been on the various construction companies to complete their work or schedule in a very efficient manner. The economy which has been showing growth on the GDP percentage has shown a dip this year which is an area of concern. Overall when the economy will grow it will have impact on supply and demand both. Demand will increase because people have employment and purchasing capacity. Supply will increase because with the growing economy the demand will be estimated and forecasted. VIII. Appendix Table8: Gross Fixed Capital Formation at Current Purchaser’s Price Total Economy ‘Analysis of Broad Sector and Type of Assets’ Reference Griffith, A. & P. Watson, Construction Management-Principles & Practice, Palgrave Macmillan, New York, 2004 Kotler, P., Marketing Management, Prentice-Hall Inc. 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