November building stats confirms new development weakness
JOHANNESBURG (JANUARY 22) - the StatsSA release of November Building Statistics yesterday almost completes the building activity picture for 2008, confirming the weakness of the residential development market at present, FNB notes in its comment on the data.

For the month of November, on a year-on-year basis, the number of residential units completed declined by –11,7% year-on-year.

Possibly, FNB notes, a better indicator of the near term expectations of the market is the number of units’ building planes passed, which declined by a massive –33,2% year-on-year in the same month.

Building Stats can be volatile on a month to month basis, but looking at the year to date (i.e. the first 11 months of 2008), John Loos, FNB Home Loans Property Strategist says, there can be little doubt as to the weakness that has set in. The total number of units completed for the first 11 months of 2008, compared to the corresponding 11 months of 2007, declined year-on-year by –8,9%, while the number of plans passed for the period fell by –17,8%.

Loos believes that the weakness of demand for residential property is also reflected in the low inflation rate in value per square metre of building plans passed and completed.

Year-on-year, average value per square metre of residential units completed rose by a mere 4,8%, while the average value square metres passed rose by 4,3%. This low inflation rate was despite input cost inflation believed to have been significantly higher as at November.

The producer price index for building materials showed year-on-year inflation of 18,4% as at November, suggesting that the fall in global commodity prices had yet to have a positive impact on material costs as at that stage. In addition, it should be
remembered that, although the residential side of building construction is weak, other areas of construction remain stronger, and may help to exert upward pressure on input costs.

Much of the reason for slow inflation in average value per square metre Loos says is thus believed to be the result of weak pricing power within the residential building sector as opposed to input costs.

Since a stage of 2006, there has been a broad decline, albeit mild, in the average size of units completed. This has also long been expected, given the search for more affordable living by a portion of the market. The search for affordability kept the lower priced end of the market more buoyant for longer as some demand shifted down market.

In recent months, the average size of units’ plans passed has declined significantly from 140,8 square metres in June 2008 to 107,6 square metres as at November, suggesting that the average size of units built may decline more significantly in 2009.

Loos in his outlook says the –8,9% decline in number of units completed for the first 11 months of 2008 was somewhat better than expected, “as early on last year we had expected a decline closer to -25%. It is believed that much of this expected decline will only be reflected in the numbers in 2009, with the more significant –17,8% decline in plans passed a possible indication of things to come.”

“Therefore, although interest rates have begun to turn downward, 2009 is not expected to be a good year from a residential development point of view. Firstly, although a gradual recovery in residential demand is foreseen as 2009 progresses and interest rates fall, it is believed that there remains an oversupply of existing property in the market that needs to be mopped up.

“Secondly, ongoing input cost inflation has made it tough for new developments to compete price-wise with the existing building market whose prices have been declining in many areas.”

As a result of these factors, Loos believes that the new residential building market may have to wait until at least 2010 for noticeably better days.

Article from: www.rodneyhayter.com