Architects as Nowcasters of Housing Construction
Holmes, Mark J., Mitchell, James, Silverstone, Brian, National Institute Economic Review
For more than four decades, the New Zealand Institute of Economic Research (NZIER) has conducted a two-question, quarterly survey of architect forecasts of public and private sector construction expenditure. This qualitative survey is published one week after the end of each quarter and nine weeks ahead of the official quantitative data thereby giving architect opinion nowcasting status. This paper covers selected aspects of this unexplored series with particular reference to residential housing construction and the value-added information from architects as nowcasters. Specifically, we consider several qualitative-to-quantitative conversion methods, in-sample and out-of-sample performance, cyclical features and respondent dynamics. Although our work relates to architects--a sub-sector of the service industry--our results have a wider application to business survey questions using ordered qualitative responses.
Keywords: Nowcasting; real-time; architects; qualitative-to-quantitative conversion; business surveys; housing construction
JEL Classifications: C83; E37
'Housing is the most important sector in [US] economic recessions, and any attempt to control the business cycle needs to focus especially on residential investment ... The best time to fight the housing cycle with tight monetary policy is when the wave is starting to rise, not when it is cresting' (Learner, 2007, pp. 150-1).
Construction expenditure on residential housing and apartments, commercial premises and public buildings is a significant and relatively volatile component of real GDP in most economies. New Zealand is a typical example. Construction expenditure is around a third of fixed investment outlays and around 10 per cent of real GDP. Because construction expenditure has significant short-term activity and employment effects and long-run capacity-enhancing effects, accurate forecasting of construction is important for both private and public sector decision-making and for monetary policy.
One source of forecasting information on construction in New Zealand is the official series 'Value of Building Work Put in Place'. Changes in this quarterly series, which is available some ten weeks after the end of each quarter, correlate very strongly with official quarterly GDP construction series. While this publication lag might be acceptable for many public and private decision-makers, for others, the availability of building and construction activity signals earlier than ten weeks is potentially more useful.
One source of significantly earlier forecasting information on construction prospects is the quarterly survey of architect opinion published since 1964 by the New Zealand Institute of Economic Research (NZIER). The results of this survey are published just one week after the end of each quarter and well ahead of most construction-type series in New Zealand. This outcome therefore gives the opinion of architects, if reliable, real-time or nowcasting status. (1)
The survey asks just two main questions with twelve components. Specifically, as shown in table 1, architects are asked to forecast qualitatively, expenditure one-and-two years ahead for three classes of construction: housing, commercial buildings and flats and central and local government building. They are requested to provide their forecasts from two perspectives: from work in their own office and from their knowledge of the work of other architects. Among the alternative approaches to quantification and aggregation available, including those available when firm-level panel data exist, the NZIER architect responses are simply aggregated to produce a net balance statistic (that is, the percentage of respondents replying 'up' less the percentage replying 'down'). Table 1 shows the survey results for March 2009 where, for example, the net balance on own-office housing construction 12 months ahead (Question 1a) is -45 per cent. …