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 StatsSA's
November building stats continue to point towards an extremely weak picture
for the residential building sector. For the three months to November
2009, the square metreage of residential buildings completed declined
by -35 percent year-on-year, almost unchanged from the -35.4 percent year-on-year
decline for the three months to October.
Massive declines in building plans passed
There is, at best, some early indication that the sector may be moving
towards stabilisation, with a diminishing rate of decline in square metreage
of building plans passed now apparent. For the three months to November,
square metres of building plans passed declined year-on-year by a still-massive
-27.4 percent. However, this is an improvement from the -32.3 percent
for the three months to October, and more so compared to the -48.7 percent
for the three months to September.
Obviously, it remains to be seen as to whether some improvement in building
plans will translate into an actual improvement in activity.
Surprisingly, perhaps, we have not seen strong evidence of a shift towards
a smaller average size of unit, despite affordability in the new residential
building sector being a major issue. There has been a gradual decline
in the average size of buildings, from a peak of 140.9 square metres in
September 2006 to November 2009’s 122.7 square metres. But this is
still considerably larger than the big dip in size after the 1998 interest
rate spike, to 63.4 square metres.
Oversupply during boom
This possibly has to do with our perception that the biggest oversupply
of residential property was created in the flats and townhouses segment
of the market during the boom, and that in 2009 we started to see a noticeable
decline in this segment’s percentage of total building.
In other words, the affordability drive may be more pronounced than what
the building stats suggest, but a stronger cut-back in building of small-sized
flats and townhouses due to oversupplies already existing leads to the
average size of unit for the total market not declining as much as one
would expected.
FNB Valuations stats according to the year in which a home was built,
suggest that there has been a more pronounced decline in average size
of building since 2004, as affordability became more of an issue.
However, the smaller-size drive was predominantly in the sectional title
market, a segment that gained in significance during the boom, but which
has probably declined in importance for the building sector temporarily
during the slump, as the building stats also suggest through their showing
a decline in importance of flats and townhouses.
Cost pressure
The November 2009 Producer Price Index for Building Materials showed
a year-on-year decline for the third consecutive month, to the tune of
-2.8 percent. This is probably reflective of both the global commodity
price slump as well as the domestic building construction sector slowdown.
Cost pressures still in play
However, in the absence of stats for labour and other input costs, it
would be incorrect to assume that overall building costs have declined.
Indeed, if average value of buildings completed and passed is anything
to go by, cost pressures are still in play, albeit less so compared with
a few years ago. Average square metre value of buildings completed for
the three months to November rose by 9.7 percent year-on-year, while that
of plans passed rose 12.3 percent.
As such, only limited progress has been made in reducing the gap between
replacement value and existing home values (full title).
Back in the days of the property boom, we saw a steady diminishing of
this gap from 35 percent at the beginning of 2001 to -0.2 percent by the
end of 2007. The increasing ease with which developers could bring competitively
priced new stock the market contributed to the building boom that we saw
gathering steam from around 2002.
This came to an abrupt end around 2008/09 as input cost inflation surged,
while existing house prices declined, once more widening the gap between
replacement cost and existing home value.
During the second half of 2009, we saw some slight decline in the gap
between replacement value and existing house prices starting, but the
relief is not yet significant, as the gap still stands at around 18 percent.
Conclusion
A diminishing rate of decline in building plans passed may possibly be
an early sign of pending improvement in the residential building environment.
However, the figures remain very weak. The existing home market has indeed
seen an improvement in demand through 2009, but there remain many stressed
sellers in the market, and as such many bargain prices. This, coupled
to building cost issues that don’t appear to altogether have gone
away, suggest that the road to building sector recovery is a long one.
As such, we remain of the belief that it may only be in the second half
of 2010 that we begin to see positive year-on-year growth in completions
off a very low base.
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Newsletter:
3 February 2012 to 10 February 2012 - Krugersdorp, Gauteng, South Africa
