The Construction Industry is dying out. 📉 Covid-19 crisis growing Сhallenges and Opportunities.
The construction industry is huge, “stable”, as old as the world, and consumes up to 10% of all money used in the world. On average, it can be considered that one in ten able-bodied people in the world is somehow connected with the construction industry. The construction industry is partly the driver of the economy, many internal processes are tied to it.
Since 2000, there has been a steady tendency in the construction industry around the world to reduce the number of people employed in construction, and the 2008 crisis hit the construction sector especially hard and increased the outflow of specialists from the industry.
Where is the construction sector moving now? How many people will leave the construction industry after the 2020 crisis? Where can programmers go after most processes in the financial and engineering industries are automated?
The crisis of the construction industry in Europe
The construction industry remains one of the most important sectors in Europe, representing some 10% of GDP and 50,5% of Gross fixed Capital formation. It provides 20 million direct jobs only in EU.
🚧 The crisis of 2008 hit Europe’s construction industry hard. Especially Greece, that lost 80% of its construction industry output during the years 2010 to 2013, was hit very hard. Countries experienced a sudden decline in production ranging from -54.4 % in Lithuania in 2009 to almost stable activity levels in Germany and Austria.
Crises smooth out the surge in activity in the pre-crisis years.
Until 2007, construction output in the EU grew each year. However, this output showed a steep decrease from 2008 onwards. The Euro crisis which followed the global financial and economic crisis had large effects on the construction industries in many European countries. In the post-crisis period, the number of people employed in construction fell by 15–30%:
- Only in Europe, approximately 4,000,000 people left the construction industry (between the peak in 2007 and the “bottom” in 2013)
- from 2014 to 2018, 70% of these people returned back to the construction industry
The population of Europe over the past 20 years has grown by 15 million people. And about the same time, about 5 million people left the construction industry.
Does this mean that new, more attractive value-added industries have emerged? Where do the builders go?
The crisis of the construction industry in the United States
A similar downward trend is observed in North America. Peak employment was reached in 2000. But unlike Europe, the long-term trend here until 2018 had a continuous upward trend.
In 2006, at the peak of the last housing boom, the industry employed 7.7 million people. As of July 2018, US construction employment has reached almost 7.2 million people, (only 480,000 less (6%) less than the previous peak in 2007).
And now the long-term trend in USA is clearly reaching a plateau.
As in Europe, after the crisis of 2019, most likely only in the United States, approximately 2–3 million people working in construction will have to change jobs.
Home buyers in developed countries (where the interest rate on loans is less than 3%) are hesitant to invest in real estate (the “new home”), because of expectations that the market will slide into recession and interest rates on mortgage debt can rise significantly.
Since since 2008 mortgage rates in many developed countries have approached zero, the governments of these countries have chosen the entire margin for easing monetary policy and it can be expected that someday the central banks of developed countries will be forced to raise rates, which will cause a wave of crisis that will wash away “Zombie Companies” and property owners who cannot pay the loan at the new rate.
Therefore, a possible recession is possible (after raising rates) in construction will be no less than after the 2008 crisis. (In the next article I will take open data for the city of San Francisco and show the trends in construction using the example of this city).
A similar trigger (an increase in the interest rate in floating rate agreements) provoked the collapse of the bubble of mortgage loans in 2008 in the United States, triggering the onset of the global financial crisis.
The graph shows the average interest rates in the world over the past 200 years, which until 1980 were around the world at a balanced and reasonable level: about 4–6%.
The crisis in the construction industry in developing countries
The crisis may not greatly affect the construction market in developing countries, where many medium and small companies will leave the market in a short time or be absorbed by the heavyweights of the market and where mortgage rates, unlike developed countries, can still be reduced, consumer demand will most likely be stimulated , and the bottom will be reached faster than what happens in developed countries.
The crisis will affect all countries equally, but in the United States such mortgage crises are faster because the floating rate forces consumers who are at risk of bankruptcy to sell their property in the short term. European countries, insuring a fixed rate, stretch the consequences of a possible mortgage crisis for 10 years.
On average, in developed countries, construction currently accounts for 5–10% of the country’s total GDP and about 5% of all European workers are employed in the construction sector.
🎢 In developing countries, the share of the construction sector from the country’s GDP is about two times higher than in developed countries and is at the level of 10–20%.
On average, it can be considered that every 10 able-bodied people in the world are somehow connected with the construction industry (the construction industry makes use of low-paid and less-skilled workers, and as such is a major employer worldwide of migrant labour).
If we project the situation in Europe to the rest of the world, we can assume that approximately 20% of all people working in construction today, starting in 2021 lose their jobs and move to other industries (possibly temporarily).
👷♂️ 10% x 🌎 7 594 000 000 / 🔩 2 x ☣️ 20% = 👷♂️ 75 940 000 people
(every tenth) x (earth population) / (able-bodied only half) x (crisis)
Thus, in the coming years, about 75 million people who previously worked in the construction industry will lose their jobs or move into a new industry.
Impact of COVID-19 on the construction industry
Since the beginning of autumn 2020, we can expect a decline in the construction industry, which could hit harder than the 2008 crisis. Who needs a large number of office space, a huge offer of apartments, commercial space and parking in big cities?
Now you can work from any convenient place and sell / buy any goods from anywhere in the world where the Internet catches. In this crisis, new companies and start-ups will begin to grow, which will lead us to a new level of consumption and the possibility of making money before the next big crisis.
We will need fast Internet access and a warm bungalow for the night. And in the cities there will remain families with children and elderly people who need the infrastructure of relatives, education and leisure centers.
Crisis exposes the problems of the construction industry
Even before COVID-19, construction industry performance was low compared to other sectors. In terms of digitalization, only comrades working in the agricultural industry are behind the builders and therefore the builders have nowhere to retreat.
- Stagnant productivity, low digitization and low profitability have dogged the industry for many years, as well as its highly individualized approach to construction and a fragmented ecosystem .
- Over the past decades, the amount of data used in planning has grown like an avalanche, while the incoming data has not only not been processed but subsequently has rarely been systematized, lost forever on local drives. Therefore, at the moment, we can come to the conclusion that the construction industry is today one of the least digitized industries.
- In comparison to other industry sectors, one of the challenges that the construction industry has been facing is a low level of productivity. At the same time, 78 percent of engineering and construction companies believe that project risks have increased.
The amount of data is growing like an avalanche and the incoming data is not processed or systematized in any way
The construction industry lags behind other sectors — because it is large and heterogeneous and it will take many more years to catch up with the level of automation that has already been achieved, for example, by mechanical engineering.
Now during the crisis — the construction industry is waiting for the long-awaited (difficult) update.
The use of big data to systematize the incoming information and machine learning to predict the cost and time parameters in construction has not yet reached the development departments, which are completely immersed in the implementation of BIM tools and solving current problems between the growing number of contractors involved in the construction.
🐘 Large construction companies that in the near future will not use BIM tools and automation tools (BIM in construction has demonstrated the ability to save up to 20% of project costs) in their work will be forced to leave the market in this crisis.
And companies that after the crisis will not think about using big data, data analysis and machine learning in their work, risk leaving the market during the next crisis.
Programmers, who after some time will be closely in the financial and engineering industries, are invited to carefully look at the construction and agricultural sectors, where the complexity of tasks is not inferior to the tasks of automation in the engineering and financial sectors.
Of course, in the construction industry, salaries are not so large compared to other sectors of the economy — construction loses in terms of working conditions, but here you can find a huge field for your creativity and your creativity. And you can find companies working in the direction of building automation in any corner of the world — from a village in Bali to the Canadian outback.
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