Residential building activity to grow slowly

Despite some poor residential building completion figures, we expect a return to moderate growth in the remainder of this year and next year.

Stats SA's residential building statistics during the first half of the year have surprised us on the downside, showing year-on-year decline for the year-to-date after some moderate growth for 2012 and last year.

This has taken place while our FNB Estate Agent Survey has steadily pointed to increasing residential stock constraints in the homes market. Also, the square metreage of residential building plans passed has continued to rise this year.

This has led us to wonder whether the completed data for residential plans has 'issues' and perhaps is not recording the level of building completions as it should. This would be difficult to ascertain.

Regardless of this, it would appear the environment is ripe for mild growth in residential building activity in the rest of this year and into next. But the emphasis is on 'mild'.

Growth trends in residential building activity tend to lag behind trend changes in demands for existing residential property by a considerable margin, due to the long planning and preparation period for a new building.

After the second leg of the 'double dip' in new residential mortgage loans granted in 2011, a recovery in new mortgage lending growth to last year was followed by a return to positive growth in the square metreage of residential building plans passed, with a lag, last year and this.

For the first quarter of this year, the value of new residential mortgage loans granted had reached growth of 21.35 percent year-on-year. The response of the residential building sector was 8.2 percent year-on-year growth in square metres of plans completed for the first five months of this year, up from 6.4 percent last year.

The statistics indicate, therefore, that this year the residential development sector has planned to grow at a rate faster than that which it set itself last year.

We would expect residential building completions to follow suit. However, despite the level of building plans passed having continued to grow in the first five months of this year, residential buildings completed data shows a different picture.

The square metreage of completions declined significantly by -8.8 percent year-onyear for the period.

This may seem to be at odds with data simultaneously pointing to growth in plans passed. But it is also possible that it is the lagged effect of the second leg of the double dip in residential demand back in 2011 - which caused a mild dip in the volume of building plans passed in 2012 - that is filtering through.

Nevertheless, we foresee positive growth in residential building activity returning in the second half of this year and continuing into next year.

The reason is that data points to a strengthening in growth in plans passed in the first stages of this year. With a lag, we expect this to filter through into growth in building completions. Also, the level of residential building activity last year was a little more than half of that in 2007.

This was the peak of the last building boom, and at a level not significantly higher than that at the end of the 1990s, despite the economy these days being substantially larger.

It goes further, though. Admittedly, building costs have been more of a constraint on the supply of new stock in recent years.

The FNB full title replacement cost gap (the percentage by which the average replacement cost of a home exceeds the average existing home price) rose from zero at a stage of 2007 to 25.7 percent by early 2012, precipitating the post-2007 slowdown as new home prices became less competitive with a weak market at the time.

However, this replacement cost gap receded mildly to 22.9 percent by the second quarter of this year.

Recent existing home price inflation has been positive in real terms as stock constraints grow.

Examining our FNB Estate Agent Surveys of recent quarters, which pertain largely to the existing home market, we have seen a mounting scarcity of existing residential stock.

By the second quarter 2014 survey, when agents were asked for the key factors driving their near-term expectations of residential market activity, 22 percent cited stock constraints as a key issue in their businesses.

This percentage has been growing since 2012.

To alleviate the stock constraints, residential demand would have to slow or building activity would have to be ratcheted up a notch or two.

We expect a combination of these possibilities.

The start of gradually rising interest rates is expected to slow growth in residential demand in the near term, but in a moderate way.

However, we expect that stock constraints will remain significant, and this will have to be alleviated by moderate growth in residential building activity.

Therefore, we project such a moderate positive growth rate in square metreage of residential building plans passed, to the tune of 1.6 percent for this year and 8.4 percent for next.

This higher level of forecast residential building activity is expected to contribute to mild slowing in house price growth this year and next.

Our forecast of a return to growth in the building completion numbers is also informed by the SARB detail for mortgage loans granted by purpose.

The value of new mortgage loans granted for the construction of new buildings accelerated by 160 percent year-on-year for the first quarter of this year, suggesting significant growth in building activity to come. Although this included commercial building mortgages as well as residential, we expect that the residential component should contribute to some extent to this acceleration.

Finally, the financially constrained household sector is expected to sustain the broad trend towards a smaller average size of residential building, a broad trend since 2007. This should favour the flat and townhouse category of property.

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