Whisper this softly, especially if there’s an economist about…but supply doesn’t always create its own demand: Say’s Law, the oldest orthodoxy in the book (named after its creator in the eighteenth century), tells us any significant reduction in supply will increase demand, and the price mechanism will respond by adjusting prices upwards to rebalance the market (vice versa if supply increases). And anyone tracking the inexorable rise in gas prices since Russia invaded Ukraine in February could be forgiven for thinking Say’s Law is simply a fact of life: energy supplies were restricted, the energy demand remained static (or went up), so gas prices shot up by 40% to rebalance the market. But that’s not always the way…
After all, we might all want to own an Aston Martin DB4 (I certainly do) or bring home the Mona Lisa, but there are only so many DB4s left on the road. There’s still only one Mona Lisa: so the supply of either can’t possibly increase to meet demand, however strong that demand gets: as economists would say, the structure becomes increasingly inelastic, and all that happens is the price goes up; without increasing supply.
That’s pretty much the problem with global housing markets at the moment.
Demand for new housing has never been higher, with more than 1.6 Billion of our fellow citizens across the planet either currently homeless or in dire housing need (www.homelessworldcup.org/). But on the supply side, conventional dinosaur construction is incapable of meeting that demand in any significant sense: so the market has become increasingly inelastic, just like the market for DB4s or the Mona Lisa, only uglier and (considerably) less desirable. As you read this, the homelessness figure in the United Kingdom is 274,000. Still, last year those same dinosaur developers only managed to build 5,606 new affordable homes…so the price of houses went up (average prices rose by a startling 12.8% in the last quarter). This means supply hasn’t been determining demand at all…
And that’s because those dinosaur developers have been so wretchedly inefficient at doing what they do: creating the highest waste levels of any industrial sector on earth, losing millions of man hours while workers sit huddled in huts waiting for the rain to stop, and building from scratch in the mud on inner city sites that are difficult to access and even harder to get out of (meaning, in turn, long columns of trucks belching more fumes into our already polluted skies). Mired down by those realities, the supply of new homes has become increasingly inelastic, and economic orthodoxy has proved incapable of finding a solution to the housing crisis: for sure, the price mechanism isn’t going to help the homeless population any time soon.
But it’s not all doom and gloom
It’s a Darwinian Thing
Just as a grain of sand produces a pearl in an oyster, systems and structures will always evolve to put the dinosaurs in their place, and right now, when it comes to construction, that particular grain of sand is emerging technology: Modular Construction in particular.
As in most, if not all, industrial sectors since the dawn of the industrial revolution, technology is the vital spark that brings essential elasticity into the supply chain: disrupting conventional systems to meet burgeoning demand. And when it comes to housing markets, Modular Technologies can create a new home 30% quicker than any of their dinosaur counterparts because core components for the building are manufactured offsite, with intricately planned assembly schedules that reduce waste levels to virtually nothing. So no more wading around in the mud or waiting in a hut for the rain to stop…at every conceivable level; Modular Construction does it better.
On which basis we can all look forward to a radical, supply-based readjustment in construction: capable of changing millions of lives for the better.
Whatever the intrinsic failings in his theory might be, Mr Say would have been happy with that…
Executive Overview
Modular Technologies are the grain of sand in Construction’s oyster: we can all look forward to a brighter future
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