Gloom for residential builders

2008-01-24 00:00

Gloomy times await the residential building sector, according to the FNB CPF Residential Building Cost Index, for the fourth quarter of 2007, constructed by Industry Insight.

Released yesterday, the index revealed further slowing down in residential building cost inflation, the fifth consecutive quarter of declining year-on-year inflation following a significant surge in building cost pressures last year.

The slow-down is believed to be reflective of a residential market increasingly under pressure from the lengthy period of interest rate hiking, along with a slowing economy.

The index reflects the average building cost per square metre as charged by building contractors when winning tenders in the formal residential property sector.

The average building cost per square metre was measured at R5 264 for the fourth quarter.

Year on year, building cost inflation measured 4,7% for the fourth quarter. This is a further decline from the revised 10% registered in the third quarter, and well-down from the 38,8% peak reached in the third quarter of 2006.

FNB Property strategist John Loos said that contractor pricing power is expected to suffer as a result.

"Furthermore, the relative strength at the lower end of the market, the result of an affordability deterioration over the boom years, may be an increasing incentive for a portion of development activity to shift away from the more luxurious end of the market towards the lower, less frills, end. Such a shift can also have an impact on the index’s price inflation rate."

It is also possible that the lower inflation rate is partly reflective of lower materials cost inflation, which has shown some decline, over the past three quarters.

"This is indicated in the producer index for building materials, which averaged 8,8% year on year for the first two months of the fourth quarter, well lower than a 15,9% peak in the first quarter of 2007."

He noted that the near term outlook for residential builders looks bleak, adding that the downturn in the index inflation rate could move into negative territory during the first half of this year.

"This would not necessarily reflect a decline in building contractors’ input costs, but more a reduction in their pricing power due to weak market conditions."

The main building sector indicators (new residential mortgage loans granted, new mortgage loans granted for construction of buildings, growth in square metres of new residential space completed etcetera) point to weakening in activity levels.

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