47 OVER-TRADING EVENTUALLY WEAKENS DEMAND

Adam Smith warns, ‘Scarcity of money is not always confined to improvident spendthrifts. Over-trading is the common cause. Sober men whose projects have been disproportioned to their capitals are as likely to have neither wherewithal to buy money nor credit to borrow it, as prodigals whose expense has been disproportioned to their revenue.’

DEFINING IDEA…

Make hay while the sun is shining.

~ MIQUEL DE CERVANTES, SPANISH NOVELIST AND POET

When it comes to sober men being dis-proportioned to their capital and a penchant for over-trading, few better examples exist than in the construction industry. According to estimates by The Economist, the total value of residential property in developed economies rose by more than $30 trillion between 2000 and 2005, an increase equivalent to 100% of their combined Gross Domestic Product (GDP).

A cacophony of ‘experts’ reassuring prospective investors that property was a sure bet, together with easy credit, meant suppliers of new property bent over backward to keep pace with demand. According to the Nationwide Building Society, the average UK home increased in value by 215% between the first quarters of 1997 and 2007. With figures like these, it’s easy to see the attraction of property as more and more people sought to cash in on the boom.

Channel 4’s Cutting Edge produced a report called ‘Bobski the Builder’, during which the cameras followed two building crews - one led by Jarek, an ex-chocolate salesman from Poland, and the other by Terry, a fourthgeneration English builder. Granted, Jarek was part of the over-trading problem Smith warned about, as he was largely self-taught and clearly his previous experience in the confectionery business had limited value. Yet compared to Terry, he looked like a seasoned professional. Terry was every negative stereotype of the building industry rolled into one: he never turned up, the jobs took significantly longer than he promised, he was expensive and the end product was shocking. If anything, the documentary served to illustrate just how easy it is to prosper in a booming economy. It’s unlikely either man will fare well in the subsequent bust.

Today a short cruise around any neighbourhood, from rural villages in Scotland to city suburbs with waterfront views, will prove, ‘Before their projects can be brought to bear, their stock is gone and their credit with it.’ In late 2008 many building sites are as deserted as the illustrious Mary Celeste!

In the UK an estimated £11.7 billion in housing projects was scrapped between 2007 and 2008, leading to increased unemployment as the construction industry contracted sharply. Easy credit disappeared, and with it access to mortgages for would-be buyers, as well as bridging finance for construction companies.

Smith warns of the perils of over-trading and the indiscriminate damage this will lead to, ‘When the profits of trade happen to be greater than ordinary, over trading becomes a general error among both great and small dealers.’

HERE’S AN IDEA FOR YOU…

Decades of experience is no guarantee of quality, nor is relative inexperience necessarily a harbinger of impending disaster. Whatever professional services you are seeking, from a builder to an accountant, always ask for references and be sure to follow them up. If possible or appropriate, inspect the work and verify their involvement. The fact is, asking for a reference is more than most people will do and will more than likely scare off dubious practitioners.