FNB – Whilst 2nd quarter buildings completions rose sharply, affordability still constrains levels

• Last week’s release of June 2015 Residential Building Statistics gave us the complete building picture for the 2nd quarter of 2015. The quarter was significantly stronger than the 1st quarter. After a 1st quarter growth rate of 9.8%, the number of residential units completed saw a sharp growth acceleration to 34.8% year-on-year in the 2nd quarter.

• To use building statistics as a leading economic/business cycle indicator, such as the SARB (Reserve Bank) does in its Composite Leading Business Cycle Indicator, one needs to examine Building Plans Passed, rather than completions, and preferably excluding the “Houses smaller than 80 square metres” category. Compiling a series for Residential Plans Passed for Houses larger than 80 square metres, Flats and Townhouses, we see a picture of slowing growth, from a relative high of 17.4% year-on-year in the 3rd quarter of 2014 to 4.2% year-on-year in the 2nd quarter of 2015.

• While we have seen a year-on-year growth acceleration in the 2nd quarter, the 2nd quarter 2015 total residential completions level of 10,627 remains a lowly 47.6% of the boom time high of 22,348 units completed in the final quarter of 2006. The most recent levels of units completed even remain on the low side compared to pre-boom levels around the year 2000.

• The reason for actual building completions levels being so low, even compared with pre-boom levels, has to do with both existing as well as new homes being far less affordable than back before last decade’s price boom, when measuring home values relative to average employee remuneration.

• The move to address the affordability challenge of post-boom years is reflected in the rising share of units’ plans passed in the “Flats and Townhouses” category, with their greater density and lower land use. Whereas in 2010 Flats and Townhouses’ plans passed made up 28% of total plans passed, for the 1st half of 2015 this had increased noticeably to 37%. The market will thus increasingly sacrifice outdoor space (stand size) in order to address the affordability challenge that has arisen since the property price boom of last decade.

• We believe it realistic to expect positive growth in completions for the years 2015 and 2016 as a whole, following a decline of -8.3% in 2014. After the strong 2nd quarter growth rate, we are likely to revise our current growth forecast of 8.5% for 2015 as a whole upwards. However, weakening economic growth over the past 3 years, and more recently rising interest rates too, leads us to believe that the strong double-digit growth in the number of units completed in the 2nd quarter is not sustainable for too long, and would expect growth in 2016 to be back well into in single-digit territory.

Read more here: 2nd Quarter 2015 Review of Residential Building Stats