Higher rates to weigh on building

The latest increase in interest rates, combined with another expected increase in August, will see the outlook for the residential building sector remaining negative for the remainder of this year and into 2009.

The latest building figures - and particularly the year-on-year (y/y) growth in total building plans passed - highlight that building plans passed for the residential sector - despite a slight improvement in April - continue to be affected by the rising level of interest rates, slowing consumer demand, high input costs, slower growth in house prices, as well as an excess in buy-to-let accommodation.

On the other hand, the non-residential buildings plans passed continue to strengthen, suggesting that the rising level of interest rates and high input costs is not having such a significant impact on this sector as yet. Growth within the non-residential sector is largely driven by the growth in public investment in construction and civil engineering projects ahead of the 2010 Soccer World Cup.

Recent data shows y/y growth in total building plans passed increased in April to 6.4% from negative growth of -19.5% in March.

This increase was largely due to the significant increase in non-residential building plans, which recorded growth of 88.5% in April compared to 4.4% in March.

Residential building plans growth improved somewhat, but remained in negative territory, increasing to -7.2% from -24.4% in March, with additions and alteration also increasing to -8.9% from -20.8% in March.

When looking at the seasonally adjusted month-on-month (m/m) growth, total building plans passed increased by 22.5% after having recorded negative growth for two consecutive months at -18.0% in March and -14.4% in April.

This significant improvement was due to increases seen in all three categories - residential buildings (by 6.3% in April from -17.2% in March), non-residential building plans (by 72.1% April from -7.2% March) and additions and alterations (by 23.9% in April from -26.8% in March).

Such large m/m increases can be attributed to the extra working days during the month of April due to the Easter holidays, which possibly gave the municipal offices more time to process building applications during the month.

Year-on-year growth in total buildings completed declined significantly in April to -4.2% from 6.3% in March, led by declines in residential buildings completed (to -5.6% in April from 6.9% in March) and non-residential buildings completed (to -8.3% in April from 6.9% in March). However, additions and alterations increased (to 6.4% in April from 3.6% in March).

Industry surveys confirm that business confidence within the residential building sector remains unfavourable due to slowing building activit, on the back waning demand for residential buildings.

In the second quarter of 2008 business prospects - especially for the residential sector - are expected to remain unfavourable, and a reversal in this trend is not expected this year.

This grim outlook is underlined by the fact that the SARB increased interest rates by a further 50 basis points at their June MPC meeting, resulting in a cumulative increase of 5% in interest rates since June 2006

Article from: www.sundaytimes.co.za