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ANALYSIS OF HISTORICAL CONSTRUCTION COST MOVEMENTS IN SCOTTISH SOCIAL HOUSING FINAL REPORT

13.0 LITERATURE REVIEW

13.1 Definitions

Capital costs: Costs associated with extending the service life of a dwelling by refurbishment (modernisation and improvement) and therefore reducing the annual replacement rate of housing stock.

Maintenance costs: Costs associated with the work that retains the provision of essential services (reactive and preventative).

Management costs: Indirect costs associated with keeping dwellings to an acceptable standard.

13.2 Methodology

The literature review was carried out by searching all relevant journals for articles on housing maintenance costs, housing stock transfer, Registered Social Landlords, economic trends in Scotland and other variations of key word searches. The search produced a large quantity of articles, however upon further investigation very few of them covered the exact area of research. The majority were more concerned with the social issues surrounding housing maintenance and stock transfer.

Pertinent articles have been reviewed in this literature review in order of perceived relevance under the following general headings:

• Housing maintenance costs and strategies
• The impact of housing stock transfer
• Labour, wages and productivity
• The Scottish economy

13.2.1 Literature review research aims:

• Investigate potential capital, maintenance and management costs for RSL's over the next 30 years.
• Investigate historic capital, maintenance and management costs.
• Identify main factors that affect these costs.
• Investigate the impact of housing stock transfer proposals on maintenance costs.
• Investigate the variances across the regions and identify reasons for them.
• Identify real wage change and determine if there has been an increase in productivity.

13.3 Housing Maintenance Costs and Strategies

Olubodem and Mole (1999) Evaluation of defect influencing factors in public housing in the UK, Structural Survey, Vol. 17. No. 3.

This paper provides the results of a survey of local authority building surveyors involved in the day-to-day diagnosis of defects in public housing stock. The results show the most frequently occurring defects in public housing stock as perceived by the surveyors along with the defect-cause criteria. Although this paper acknowledges that the major factor affecting public housing maintenance is budget, it concentrates on other variables (below) to find the most frequently occurring defects.

Component defect indicators for the five defect causing criteria

El-Haram, M.A. and Horner, R.M.W. (2002a) Factors affecting housing maintenance cost, Journal of Quality in Maintenance Engineering, Vol 8, No 2.

For many local authorities and housing associations, building maintenance costs are rising rapidly (RICS (BMI), 2001). According to BMI, maintenance expenditure at constant prices rose in 2000 for the seventh successive year. This paper researches the factors affecting maintenance costs and divides them into five groups:

1. Building characteristics;
2. Tenant factors;
3. Maintenance factors;
4. Political factors; and
5. Other factors.

The effect of the first group is well documented (Skinner, 1982): building characteristics such as the dwellings' age, size, height, location, structure and finishes all have an effect on maintenance costs. The age of the building has a close relationship with maintenance costs, as does the height of the building because of the additional equipment required for external maintenance tasks. This paper concentrates on the other four groups affecting maintenance costs. This study questioned fifty local authorities and housing associations in Scotland to identify and rank the factors that affect maintenance costs in order of their importance. It was suggested that by eliminating or mitigating the effect of these factors this might reduce maintenance costs or at least slow down the rapid rise in maintenance costs.

The factors affecting house maintenance cost in order of their importance

Many of the above factors appear to be management issues. The high expectations of tenants concerns the fact that there is no maintenance agreement between tenant and landlord and therefore the tenancy agreement ought to detail when and why the landlord should be alerted to maintenance needs. Budget constraints often mean that maintenance is not carried out on the basis of actual need, with urgent maintenance requirements being deferred because there is not enough money to fund them and low priority requirements being carried out in order to spend an existing budget. Tenants could be educated on the proper use of their property or provided with financial incentives to reduce the cost of repair. Including some heating costs with the rent for tenants on income support could reduce maintenance caused by tenants not heating and ventilating their properties. Shared ownership of properties caused by the tenants right to buy has caused problems with maintenance activities that need to be carried out on shared building elements.

Skinner, N.P. (1982) Local authority house maintenance - the variation in expenditure, Housing Review Vol 31.

Although this research is relatively old, many of the other research papers refer to it and therefore it was believed worth reviewing. The research considers the reasons for the large variation in expenditure of Local Authorities on housing maintenance. One unexpected finding of the research was that location appeared to play a large part in the variance in maintenance per dwelling expenditure. This was a finding that was mirrored in the private sector. Even taking into account the price differences between the north and south of the country, the north of the country spent less per dwelling on maintenance and has a higher level of disrepair than the south. The three main factors affecting the LA maintenance spending were the scale of the housing stock, the kind and age of the buildings and the geographical location.

Olubodun, F. (2001) A multivariate approach to the prediction of maintenance needs in public housing, Structural Survey, Vol 19, No 2.

The characteristics of the tenants and the effect that this has upon maintenance costs are explored in this paper. Factors, such as vandalism and improper use of property, make it very difficult to predict the future volume of maintenance. However, the tenant profile may influence the predicted maintenance need by as much as 25%. This research indicates that the attributes of the tenant will greatly affect the maintenance need. The most influential attributes were found to be the tenants' age, the presence of a disabled person in the dwelling, the vandalism index for the dwelling, the length lived in the home, the right to buy speculation and finally the likelihood of the tenant to move.

El-Haram, M.A. and Horner, R.M.W. (2002b) Practical application of RCM to local authority housing: a pilot study, Journal of Quality in Maintenance Engineering, Vol 8, No 2.

This paper considers the effect of using management strategies to improve the cost effectiveness of maintenance, in particular reliability centred maintenance (RCM) and failure mode and effective analysis (FMEA). Most management strategies appear to tackle the most cost effective way of dealing with maintenance rather than the factors that affect or cause the maintenance requirement. The results of a pilot study of Dundee City Council's housing suggests that if a maintenance strategy such as RCM was used across all of Dundee's housing stock, savings of 1.25m per annum could be achieved as well as other relevant budget planning and health and safety benefits.

Horner, R.M.W., El-Haram, M.A. and Munns, A.K. (1997) Building maintenance strategy: a new management approach, Journal of Quality in Maintenance Engineering, Vol 3, No 4.

This paper evaluates maintenance strategies and suggests that an integrated approach using all three of the strategies considered should be adopted. The three strategies considered were corrective maintenance, preventative maintenance and condition-based maintenance: the first being most appropriate for non-significant maintenance items and the other strategies more appropriate for significant items. Although the conclusion of this research was that a reduction in maintenance costs and an improvement in health, safety and user satisfaction would be likely, because of the lack of reliable failure data and maintenance cost data this has not been tested.

Bowles, G., Dagpunar, J.S. and Gow, H. (1997) Financial management of planned maintenance for housing associations, Construction Management and Economics, Vol 15, No 4.

This research concentrates primarily upon the use of sinking funds for housing maintenance and addresses the problem of inadequate financial planning for building asset management. There are many problems with the use of sinking funds to cover building maintenance costs, the first being predicting the long-term maintenance need. The calculation of the amount of the sinking fund also gives rise to uncertainty with regard to the unpredictability of interest and inflation rates. The variability of component lifespan will also affect the sinking fund projection. Simulation was used in this research to show the amounts of surplus or deficits that can arise if the sinking fund strategy is not reviewed to take into account changing component lifespan over time.

Allen, S. and Hinks, J. (1996) How long should housing last? Some implications of the age and probable life of housing in England, Construction Management and Economics, Vol 14, No 6.

This paper considers the opportunity of public sector housing organisations to implement environmentally friendly maintenance policies, the use and potential of IT being perceived as the key to increasing the efficiency and effectiveness of public sector housing maintenance management. This should create a sustainable resource that will not result in the premature disposal of housing.

Johnstone, I.M. (2001) Periodic refurbishment and reductions in national costs to sustain dwelling services, Construction Management and Economics, Vol 19, No 1.

This New Zealand study concludes that periodic refurbishment (capital cost outlay) can reduce the maintenance costs to sustain dwelling services by as much as 15%. However, this becomes less effective as the age of the housing stock increases. The full potential of reductions in maintenance cost due to refurbishment can only be realised when the expansion rate of a housing stock declines.

Sim, D. (1997) The repair and maintenance of properties in mixed ownership: A study of house-factoring in Glasgow, Urban Studies, Vol 34, No 2.

One of the major problem areas with maintenance has been in properties of mixed ownership in Scotland. Between 1975 and 1995, 27.4% of council house sales in Scotland were flats, whereas, in England, council tenants have been more reluctant to buy their property if it was within a flatted block. One of the problems that mixed ownership gives rise to is the lack of maintenance carried out to common areas. Many owners fail to understand the responsibilities of ownership of flatted dwellings or do not have the funds to pay towards the upkeep of communal areas.

13.4 The Impact of Housing Stock Transfer

Malpass, P and Mullins, D (2002) Local Authority housing stock transfer in the UK: from local initiative to national policy, Housing Studies, Vol 17, No 4.

Although this research is primarily about the general effect of housing stock transfer, it also considers other knock-on effects. One of these is the local impact that large-scale housing stock transfers will have upon the capacity of the construction sector, the resultant skills shortage and also inflation due to large scale investment programmes.

Ambrose, P (2002) The cost of poor housing, urban regeneration and non-housing outcomes, HSA conference, Housing Policies for the new UK, York, April 2002.

This research assesses the non-housing outcomes of housing investment. It suggests that in areas where there has been significant improvement in housing stock there has been a knock-on effect for other publicly funded budgets such as health, education and police service. But generally this more holistic approach is not reflected in housing investment and urban regeneration strategies.

Lloyd, G., McCarthy, J. and Fernir, K. (2001) From cause to effect? A new agenda for urban regeneration in Scotland, Local Economy, Vol 16, No 3.

The regions where maintenance costs per property are highest generally coincide with Priority Partnership Areas (PPA) or Social Inclusion Partnerships (SIPs). The SIPs initiative is tackling urban regeneration in the areas that fall within the most deprived 10 per cent of Census enumeration districts of Scotland.

13.5 Wages, Labour and Productivity

Lindsay, C (2002) Labour market assessment, Labour Market Trends, Vol 110, No 12.

Over the last forty years housing costs and housing rents in the UK have outstripped general inflation and this has contributed to the upward pressure on wages (Ambrose 2002). Statistics from the ONS suggest that, overall in the UK, the growth of earnings has declined from 2001 and has now flattened out to a steady (more subdued) growth rate (public and private sector).

Croner (2003) Reward pay indexwww.reward-group.co.uk/Reward_Consulting/pmreward.htm(accessed 19/02/03).

The latest figures from a joint initiative between the Daily Telegraph and Croner Reward that monitors pay movement for operatives, clerical and management shows that over the UK as a whole there appears to be a slow down of the rise in earnings over the last two months. Whilst Scotland follows this trend for clerical and management there has been a rise in the relative pay of operatives.

Freeman, D (2002) The impact of bonus payments on the average earnings index, Labour Market Trends, Vol 110, No 12.

The 2000 and 2001 average earnings index may well not reflect a realistic picture according to the ONS. Changes in the level and timing of bonuses have had an effect upon the index and proposals have been put forward to improve reporting of future figures. In 2001 and 2002 it appears that growth including bonuses was lower than growth excluding bonuses.

Scottish Enterprise Network (2001) Tracking the bigger picture, a snapshot of the Scottish economy, The Fraser of Allander Institute, University of Strathclyde.

Unemployment has steadily reduced in Scotland, as it has in England, that is only partly accounted for by growth in economic output. Other factors affecting reducing unemployment numbers are labour reforms and sharper incentives to work.

The ILO unemployment percentages show that Scotland performs well when compared with benchmark economies. Although marginally above the UK as a whole the percentage of available workforce unemployed is less than the North of England. Scotland's employment rate tends to be lower than the UK and this is a contributory factor to Scotland's lower GDP per person resident.

Labour productivity (GDP per person employed) in Scotland tends to lag behind the rest of the UK. There tends to be a high correlation between labour productivity and living standards within a country and it is a good indicator of the success of past investment in education and training.

Criscuolo, C and Haskel, J (2002) Innovations and Productivity Growth in the UK, National Statistics: Productivity Workshop 2002

This paper researches the relationship between innovation and technology advances with increased productivity. Although research has shown that there is a link between innovation and productivity growth it is very difficult to measure increased productivity and allocate it to new products, new processes or organisational change.

Campbell, L and Chol-Won, L (2001) Unemployment and the productivity slowdown: A labour supply perspective, Department of Economics, University of Glasgow, Working Papers 2001_13.

Other research implies that technological progress has various effects on productivity depending on the current structure of the labour market (unemployment rate).

Daffin, C and Lau, E (2002) Labour productivity measures from the Annual Business Inquiry, Economic Trends, No. 589, December 2002.

Presents new labour productivity data from the Annual Business Inquiry. It looks at issues regarding the quality of labour productivity measures derived from the ABI data and presents results for 1998 to 2000.

13.6 The Scottish Economy

Economist, The (US) (2002) Funny old recession; Scottish economy, The Economist August 24.

This journal article questions the existence of a recession in Scotland in 2001. Although it was reported that Scotland was in recession (Scotland's GDP falling marginally whilst the rest of the UK's GDP grew), many of the other economic indicators did not follow suit, house prices continued to rise, retail sales continued to grow and unemployment fell.

Bachtler, J., Josserand, F. and Michie, R. (2002) EU enlargement and the reform of the structural funds: the implications for Scotland, scotecon.net, University of Stirling.

This paper examines the potential effect of the forthcoming reforms to the European Structural Funds. From 1975 the EU has given regional support to Scotland providing around 4 billion of funding. It is difficult to gauge the impact that this has had on the economy as it has never been properly assessed. The proposed enlargement of the EU has resulted in a re-examination of the structural funding and the proposal that the funds will be redirected towards the poorer member states.

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