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The release of May residential building statistics by StatsSA begins to give us a picture of building activity for the 2nd quarter, and the picture is one of a residential building sector gaining at best limited traction.

There was mild positive growth in the square metre-age of residential buildings completed, to the tune of 6.9% year-on-year in May, slightly slower than the 7.7% growth for April. However, as monthly data can be volatile, we prefer to smooth it by using a 3-month moving average. Here, square metres of plans completed showed only 3.3% year-on-year growth for the 3 months up to and including May, which is slower than the year’s high point of 7.4% reached in the 3 months to February 2012.

The biggest driver of recent growth has been the Flats and Townhouses segment, with square metres of completions for the 3 months to May rising at 13% year-on-year. This is something of a “relative” comeback for this segment, which has typically been a “weak link” through the recent years following the end of the property boom, having been arguably more oversupplied during the boom years of last decade.

By comparison, completions of Dwelling Houses Larger than 80 square metres grew by 4.8% year-on-year for the 3 months to May, while Dwelling Houses less than 80 square metres in size saw completions decline by -1.2%.

2 months into the 2nd quarter, therefore, the data continues to show only moderate growth in residential buildings completed.

Examining building plans passed, a useful leading indicator of the near term future direction of building activity, the picture appears somewhat “directionless”. In May alone, the year-on-year growth in square metres of building plans passed was moderately positive at +5.7%. However, smoothing with the 3 month moving average, we saw a year-on-year decline of -12%, which does not convincingly point to strengthening in building activity in the near term.

The building sector is challenged by a mediocre and well-supplied existing home market, and a widening in the replacement cost gap in recent years. Building cost inflation that has outstripped low house price growth in recent years, has widened the Replacement Cost Gap to 23%, i.e. the FNB valuers’ estimate is that average replacement cost of an existing home is 23% higher than the existing home’s value, as at valuation date.   This significant replacement cost gap, in a time of still-significant household financial pressure, makes it tough for the residential development sector to bring new stock to the market that can easily compete price-wise with the existing home market.

This replacement cost gap, and a currently slowing economic and real household disposable income growth rate, leads to the expectation that the remainder of 2012 could continue to see low single-digit growth in square metres of buildings completed.

John Loos

Household and Property Sector Strategist

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