/ 17 January 2008

Home builders to feel the heat

If the South African Reserve Bank needs further evidence of the dampening effect of higher rates on real economic activity, recent building data has been just that, according to independent economic analysts.

“We remain convinced that the current interest-rate environment is proving to be very restrictive for the property market, hence the fact that real building activity in November 2007 was at the same levels last seen in Q2 2006,” they say.

A major challenge facing provincial governments and the national Department of Housing is also the extreme escalation in building costs, they add. The average cost of building a 30-square-metre Reconstruction and Development Programme unit jumped from just more than R10 000 in 2002 to just more than R25 000 in 2006/07.

Delivery is also seen as a concern in a poor province like Mpumalanga, where at current levels of delivery the housing backlog may only be eradicated well beyond 2020.

As it stands, building activity in South Africa continued to decline in November and home builders are therefore expected to remain under pressure well into 2008.

Although non-residential building activity showed some improvement, the data still shows that home building declined by 10,7% in real terms in the three months ended November compared with the previous three months.

This means that the next two quarters will probably see very subdued levels of building activity in the residential sector, note the analysts.

While building completions fell by 14,4% for the quarter ended November, plans passed did tick slightly higher. “However, the rise of just 0,4% quarter-on-quarter in plans passed hardly signals a meaningful improvement in activity going forward for the next three to nine months,” say the analysts.

“Overall, the November building stats were slightly less negative than the October figures, but any improvement on just one month’s worth of data would hardly signal a reversing trend. The main point is that the property construction sector remains under pressure, and this is likely to continue well into 2008,” they emphasise.

“We expect overall building activity (residential and non-residential) to decline by about 12% quarter-on-quarter in Q1 2008, led primarily by a decline in home building,” they note.

With real home-building activity set to decline to 2005 levels in the next few months, the prospect of higher rates will be a major concern for developers.

Furthermore, with the full effects of the rate hikes to date not yet fully reflected in the economy, a further interest-rate hike taking repo to 11,5% would have lasting effects on housing demand into 2009.

The 2006/07 fiscal year saw significant improvements in delivery of basic housing by the Western Cape, Free State, KwaZulu-Natal, Gauteng and Limpopo. North West province deserves special mention in this regard, increasing its housing delivery by more than 200% in 2006/07 compared with the average of the previous four years.

Provinces that have fallen behind in the delivery of housing are the Eastern Cape, Northern Cape and Mpumalanga. Annual housing delivery in Eastern Cape fell in 2005/06 and 2006/07 to just half the levels it was between 2002 and 2004.

The major building-cost increase occurred in 2005, which probably accounts for the slump in delivery in that year as the number of units completed fell by 25% from 2004, say the analysts.

As budgets were readjusted the following year, so 2006/07 delivery surged by nearly 50% from 2004 levels.

“The delivery of low-cost housing remains a key policy objective of government and it is encouraging to see many provinces making inroads into their formal housing shortages. Slack delivery in Eastern Cape is a concern, given the sheer number of impoverished South Africans in that province,” conclude the analysts. — I-Net Bridge