No bricks, mortar could see property prices fly in 2008

Building material and construction companies’ failure during a recession period to grow or improve skills could contribute to a recovery in house prices next year due to the shortage in properties.

This is the view of various property experts.

Elsie Snyman, CEO of Industry Insight says: “The residential boom is largely to blame for the building materials and skill shortage - there were huge contracts for new units and strong demand for renovations”, she added.

Snyman said this increased demand caught the market by surprise and forced the industry to play catch up.

Johan Snyman, director of Medium-Term Forecasting Associates agrees. He says, activity in the building and construction industry peaked in 1984 and this was followed by a recession until about 2000.

“There was a lot of uncertainty in the construction environment - factories were mothballed, people left the industry and many companies were hesitant to invest in expansion and skills,” maintained Elsie Snyman.

There was little to no growth for nearly two decades and demand declined by around 30% until structural changes, strong economic growth and the lowering of interest sparked a revival in the building industry, said Johan Snyman.

“Consumers had access to easy credit and money in their pockets which they wanted to use to buy or build new homes. This boom in demand caused building materials and skills shortages, which is not something construction companies can easily fix in the short term”, he explained.

According to the Bureau of Economic Research, contractors and sub-contractors indicate the current shortage of building materials and skills is undergoing a severe bottleneck (see graph).

John Loos, FNB’s property strategist pointed out that, during the boom years (2000 –2005) increased demand was behind the house price growth. Now he reckons costs of building materials and skills will push up prices in 2008.

According to Industry Insight’s Residential Building Cost Index, which measures residential building cost pricing, the inflation rate was 23% y/y in October 2006, well above the increase of 0,8% y/y in December 2005.

Loos maintained that the residential property market does not exist in isolation but in conjunction with commercial property as well as other infrastructure investment.

“These other sectors of the economy are placing huge demands on materials and skills, often also relevant to the residential property sector and increased shortages of building materials (for one) have led to increasing prices,” he explained.

Loos said due to much additional commercial property space now needed, government infrastructure projects and preparation for 2010 beginning in earnest, the materials and skills supply constraint would get worse before it gets better.

“These supply-side constraints, coupled with an economy growing at a steady pace of 4-5% per year, which implies steady middle-class growth and housing demand, are expected to be key in turning residential house price inflation upward from 2008.

Loos believes that it is too early for the expected driving forces of a house price inflation recovery in 2007, as there remain fears of further interest rate hikes.

Johan Snyman noted that almost all building and construction companies have invested in expansion programmes and contractors are working flat out to meet demand.

Elsie Snyman said infrastructure investment and expenditure on stadiums will continue but would not equate to the investment in housing over the last few years.

Elsie Snyman pointed out that the biggest shortage was for steel, followed by aluminum and copper.

In 2006, steel imports increased by nearly 60%.

The future is extremely bright for civil engineering and construction but the proposed government spend of around R400bn over five years will place tremendous pressure on the industry to meet the demand, reckoned Johan Snyman.

“For every R1bn spent, you will get less construction as the increase in costs will eat up the increase in activity,” he added.

Article by: Gaylyn Wingate-Pearse - www.moneyweb.co.za