John Loos, Property Sector Strategist at FNB Commercial Property Finance says that building activity held up well in the first half of the year considering the mounting economic pressures as inflation and interest rates continue to rise.
He said that StatsSA June residential building statistics complete the new residential building picture for the second quarter of 2022.
Growth in the number of units of residential building plans passed remained positive albeit slowing to 10.6% year-on-year, following a year-on-year growth rate of 17% in the first quarter, said FNB. This is the fourth consecutive quarter of tapering growth in plans passed as the post-lockdown recovery approaches a levelling out.
“The level and direction of plans passed is typically a leading indicator of the direction of building activity to come in the near term, so we would anticipate a slowdown in the growth rate of residential buildings completed in the not too distant future as well,” said Loos.
“However, it was probably too early to see slowing growth in completions as at the second quarter of 2022, the number of units completed still growing solidly year-on-year by 18% in that quarter.”
Loos said, however, that he anticipates seeing the growth rate in the level of residential units completed beginning to slow in the latter half of 2022.
Key drivers of slowing growth
The residential market is highly credit-dependent and thus interest rate sensitive, and the start of slowing growth in planning activity is reflective of the combination of rising inflation and interest rates, both eating into aspirant home buyer purchasing power growth, said the strategist.
In addition, the economy looks to be coming under renewed pressure from global sources as well as the inflation and interest rate rise, and this can dampen household employment and income growth, Loos said.
Interest rates have risen cumulatively by 200 basis points since late 2021, and the FNB expectation is for a further 125 basis points’ worth of hikes in the near term. “Our expectation is therefore that there is likely to be year-on-year decline in the level of residential plans passed later in 2022, following on a good period of post-lockdown growth.”
Residential building planning has had a reasonably good post-lockdown recovery period, following the relaxation of Covid-19 lockdowns, fuelled by the lagged impact of aggressive interest rate cutting early in 2020 as Covid-19 hit, stated FNB.
However, not all of this growth in planning had yet translated into completions, and the number of units completed was still -28.2% below the second quarter of 2019. “So the post-lockdown recovery will be shown to be a reasonably good one should most of the planning growth ultimately translate into unit completions with the customary lag.”
The most affordable housing category grows best
Loos said free-standing houses smaller than 80 square metres grew most significantly – by 24.6% in the second quarter – while houses larger than 80 square metres recorded a slower 5.1%, and flats and townhouses category recorded 10.9% growth.
Loos said that the South African Reserve Bank used the total of new plans passed for the latter two categories as a component of its leading business cycle indicator – houses larger than 80 square metres along with flats and townhouses – so sensitive are these two building categories to the economic and interest rate cycle.
“So it is encouraging to see their combined total still in positive growth territory to the tune of 8.8%, despite significant sources of economic pressure mounting,” Loos said.
“However, we would expect their plans passed total to begin to decline later in 2022, in order to increasingly reflect the renewed economic pressures emanating from high global energy and food prices driving broader inflation, rising interest rates and a slowing global economy,” he said.