As at the 2nd quarter of 2015, the SARB (Reserve Bank) reported low levels of Residential Fixed Investment relative to the size of the country’s economy. At 1.4% of Gross Domestic Product (GDP), the level remained well below the 2007 high of 2.7% of GDP, a level that had been reached at the back end of South Africa’s greatest residential boom on record. The completion of the 3rd quarter 2015 residential building picture, with this week’s release of StatsSA Building Stats, suggests that the level of Residential Fixed Investment for the 3rd quarter was not too different.
The FNB Full Title Replacement Cost Gap partly explains current residential building levels. The Replacement Cost Gap represents the percentage by which the replacement cost of the average existing full title house differs from the average existing house value. The estimates are done by FNB’s valuers’ for insurance purposes. The gap has narrowed mildly in recent years. From a high of 26% early in 2012, it had declined to 21.9% by the 3rd quarter of 2015, meaning that average Full Title Replacement Cost is 21.9% higher than the average existing Full Title home value.
This narrowing in the gap means that it is slightly easier for the Development Sector to bring “competitively priced” new homes to the market (prices that can compete with existing home values), but this constraint remains significant compared to the 0% gap reached at the end of the boom in 2007.
The net result is that we have had some mildly positive growth in Residential Building Completions in recent times, but the level of completions remains far lower than the last years of the boom period last decade. At 1.324 million square metres in the 1st quarter, we are up on the 1.232 million square metres’ worth of completions for the 3rd quarter of 2010, but only just over half the level of 2.446 million square metres achieved in the 3rd quarter of 2007.
Translating the building completions levels into growth rates, the growth has been scarce and erratic since the mild recovery started around 2010/11. During the 3rd quarter of 2015, the square metreage of residential buildings completed grew by 2.5% year-on-year. This is the 2nd consecutive quarter of positive growth, but represents a significantly slower rate compared to the 31.5% growth rate achieved in the 2nd quarter.
Therefore, a significant slowing in the rate of growth in Residential Building Completions was experienced in the 3rd quarter, after a strong rate in the prior quarter had begun to briefly look promising.
The Building cost limitations are apparent when viewing the inflation rates in the Average Per Square Metre Value of Residential Buildings Completed and Passed. This inflation rate has broadly slowed since early last year. As at the 2nd quarter of 2014, year-on-year inflation in the Average Per Square Metre Value of Buildings Completed was 16.26%. By the 3rd quarter of 2015, this rate was slower at 6.89%. Nevertheless, the costs are still rising at a time when Household Sector finances are constrained.
The recent years of cost inflation have taken their toll on the affordability of new homes. To measure affordability, we have built 2 Residential Affordability Indices. The 1st one is the Average New Unit Value/Average Employee Remuneration (SARB Data) Ratio Index (2010=100). This index (at a level of 100.82) was 6.4% higher by the 1st quarter of 2015 (i.e. affordability had deteriorated) compared with a low reached in the 2nd quarter of 2013. It is also a massive 56% higher (less affordable) than a low reached in the 3rd quarter of 2000, back before the Residential Property Boom/Bubble got under way.
The 2nd New Building Affordability Index, namely the Instalment Value on the Average Value New Building/Average Employee Remuneration Ratio Index, has risen (deteriorated) more markedly due to interest rate hiking, to the tune of 28.3% since its low in the 1st quarter of 2013, and is 102% higher (less affordable) than back in early-2000.
So, while New Building Affordability is well improved on Boom Time peaks of “in-affordability, this affordability has been deteriorating since 2013, and the indices remain far higher (less affordable) than pre-Boom levels of affordability.
Like the New Home Building Market, growth in the Additions and Alterations market has been erratic in recent years, but 2015 has been fairly good. Square Metres of Additions and Alterations Completed grew year-on-year by 22.39% in the 3rd quarter of 2015, mildly slower than the prior quarter’s 34%.
Like New Home Completions, however, it would not appear that this growth will be sustained for too long, with Plans Passed growth already back in negative territory to the tune of -4.59% year-on-year.
And as in the case of New Home Buildings, Additions and Alterations Completions are up from 2013/14 lows, but remain at slightly less than half of the boom time peak reached early in 2009.
Leading Business Cycle Indicators suggest that Residential Building Completions should slow in the near term.
The Residential Market itself is something of a “leading sector” in the economy, responding to economic environment changes quite swiftly. In fact, this happens to such an extent that the SARB uses Residential Units Plans Passed, excluding the less cyclical “Homes smaller than 80 square metres”, as one of the components in its Leading Business Cycle Indicator. The OECD uses this in its own Leading Indicator for South Africa, too, and the growth peaks and troughs in the Plans Passed growth more or less co-incide with the peaks and troughs in growth of this Leading Indicator.
For the past 3 quarters, the growth rate in Plans Passed for Homes larger than 80 square metres, Flats and Townhouses, has steadily slowed, from 17.4% year-on-year in the final quarter of 2014 to 0.7% in the 3rd quarter of 2015. More recently, the already-negative growth rate of the OECD Leading Indicator also started to turn “down”, becoming more negative in the 3rd quarter.
In short, slowing growth in Plans Passed recently, along with renewed deterioration in growth of the OECD Leading Business Cycle Indicator, would suggest that both the economy as well as Residential Building Completions growth should deteriorate in the near term.
Alan Straton
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