Residential building costs dip, says FNB

The cost of building a new home dropped slightly in the second quarter of the year, after a modest rise in the first quarter, the FNB’s Commercial Property Finance Residential Building Cost Index showed.

The index reflects the cost per square metre, as charged by building contractors when winning tenders in the formal residential property sector. It excludes affordable and so-called RDP housing.

On average, contractors charged 5,877 rand per square metre in the second quarter.

Year-on-year, building cost inflation measured 6.3% for the second quarter, down from a revised 8.2% in the previous quarter. The inflation rate in the first quarter is a far cry from the 38.8% recorded at the last peak in the third quarter of 2006, reflective of very weak residential demand and low contractor pricing power.

"A mild uptick in the inflation rate in the first quarter raised the suspicion that rising input cost inflation was to start to have an impact, but the second quarter decline suggests that very weak residential demand may be offsetting this," said John Loos, a property strategist at FNB.

"On a monthly basis we have seen a rise in the year-on-year inflation rate of the producer price index (PPI) for building materials from 7.9% in January to 12.3% in June, while we know that petrol and diesel price inflation rates rose sharply," he said.

However, countering steady increases in certain input costs is steadily declining building activity in the residential market. For the first five months of 2008, the number of residential square metres completed fell by -10.7% while the number of square metres of plans passed fell by -21.5%.

"Such building sector slumps must be expected to exert significant pressure on contractor pricing power, making it difficult to pass on input cost changes to the end user," Loos said.

Building activity in the first five months of the year has been more robust in the commercial property sector, with shopping centre completions up year-on-year by 19.5% (square metres) and plans passed by 68.5%.

For office space, the five-month growth rate in square metres completed was 24.1% and in plans passed was 12.1%. Industrial space building activity has been the weak link, registering negative growth in square metres completed for the first five months of 2008 to the tune of -17.4% year-on-year, and plans passed down by -0.3%.

Of the contracts awarded in the building cost index sample, the average per square metre cost of retail space was 7,506 rand, for office space it was 6,848 rand, and for industrial space 4,020 rand.

Artickle by : The Times