Building confidence drops
An index of builders’ confidence dropped further in the second quarter of 2008, reflecting weakening demand for new houses in the face of a tight interest rate environment.

The FNB Building Confidence Index declined to 50 in Q2 2008 from 66 in Q1 2008 and well below an index value of 88 during the same quarter last year.

The index, compiled quarterly in conjunction with the Bureau for Economic Research (BER) at Stellenbosch University, measures the confidence of all the players involved in the building industry such as architects, quantity surveyors, contractors, sub-contractors, wholesale and retail merchants, and manufacturers of building materials.

FNB chief economist Cees Bruggemans said the decline in confidence over the past quarter was due to a moderation in all categories, except in the case of quantity surveyors where confidence increased by 5 index points.

"The latter development can possibly be related to the fact that second quarter business conditions turned out somewhat better than expected by the respondents at the time of the previous survey.

"However, an analysis of other survey indicators shows that quantity surveyors are also starting to experience the moderation in overall building activity," said Bruggemans.

The business confidence of residential building contractors decreased sharply from an index value of 60 in Q1 2008 to 32 in the second quarter of the year.

Bruggemans said the second quarter growth in building activity in this sector of the building industry had hit a brick wall and was well below expectations.

For example, whereas a net 39% of respondents expected a weakening in Q2 2008, the latest survey results revealed that in fact a net 69% experienced a decline in workloads.

He stated that possible reasons for the sharply weaker demand for residential building were, among others, rising interest rates and building costs, tightening of credit standards by banks, the lagged impact of the introduction of the National Credit Act in 2007, a deterioration in consumer confidence, and rising food and fuel price inflation that is eroding the buying power of consumers.

Bruggemans indicated that the weakening in demand levels resulted in a sharp rise in tendering competition. It was therefore not surprising that a net 68% of respondents to the second quarter survey reported that the profitability of their businesses deteriorated notably.

"In view of the sharp deterioration in the tempo of residential building activity, job shedding took place. Indeed, a net 44% of the respondents to the survey reported that the number of people employed was below that of a year ago," he said.

Looking ahead, Bruggemans said business conditions in the Q3 were likely to remain unfavourable, but the respondents to the survey expected no major further deterioration.

In the non-residential building sector, John Loos, a property strategist at FNB, noted that the business confidence moderated further from an index value of 78 in Q1 2008 to 70 in the second quarter. In Q4 2007 the index stood at 92.

Respondents to the BER survey reported that business conditions turned out well below expectations. For example, whereas a net 9% of respondents expected deterioration in the growth in building activity at the time of the previous survey, Q2 2008 results indicated that a net 37% of non-residential contractor participants experienced a decline in activity.

Loos noted that the growth in employment remained fairly stable during the survey quarter, but the industry is expected to shed jobs during Q3 2008.

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