Trend in residential completions is one of slowing growth

FOR SEPTEMBER, the number of square metres of residential building completed grew by 14.8 percent year-on-year. This represents an increase on the prior months’ 9.6 percent.

However, as monthly data is traditionally volatile, we prefer to analyse trends through smoothing the data with a three-month moving average. Here we see a continuation of the recent slowing growth trend in completions. For the three months to September, year-onyear growth of 7.4 percent represents a slower rate than the 9.1 percent for the three months to August, and a more noticeable slowing from the high of 28.8 percent recorded for the three months to June.

The three-month moving average for square metres of residential plans passed, too, has been recording slowing growth, from a 15.2 percent high for the three months to April, to 1.2 percent year-on-year for the three months to September.

A similar picture is evident when examining the number of residential units completed. Here, too, we saw a rise in the year-on-year growth rate from 7.6 percent in August to 12.9 percent in September. But smoothing using the three month moving average, we see a continuation of the growth slowdown to 2.55 percent yearon-year growth for the three months to September, from a high of 31.5 percent for the three months to June. In short, the third quarter showed slower residential building completions than the second quarter, although both completions and plans passed growth rates were still positive.

The period of positive build- ing completions growth dates back to late last year. However, even after this period, the level of building completions remains moderate compared to the boom-time peak reached late in 2005. Whereas for the three months to December 2005 2.706 million square metres were recorded as completed, the three months to September this year recorded 1.324 million, still less than half of the late-2005 peak level.

Moderate levels of new residential stock being supplied to the market are thus unlikely to cause any gross oversupply of property. However, we do believe that slowing residential demand to come, as a result of a weakening economy, should ultimately lead to some alleviation of residential supply constraints that are reported to be significant in some areas.

Building costs still appear to limit the ability of the development sector to bring competitively priced new homes to the market. For the three months to September, the year-on-year average value of units completed rose by 8 percent, and of plans passed by 5.1 percent.

This inflation rate is, however, noticeably lower than the high of 20.8 percent year-onyear for units completed, recorded in May last year.

Slower increase in average value appears to have been helped by a slowdown in the inflation rate in building materials cost inflation, as per the PPI for building materials, to a low 1 percent year-on-year as at September.

Despite the challenge of competing price- wise with existing home values, the recently positive housing market environment has not only led to some positive growth this year, but has also seen an increase in the average size of homes completed, from a low of 105m² for the three months to April 2013 to 135.5m² for the three months to September.

This reflects something of a loss in market share of the category dwellings smaller than 80m², suggesting that building in the higher-priced markets has grown a little faster than that in the so-called affordable housing markets since around 2013.

Given the broad multi-year slowdown in the country’s economic growth, along with gradually rising interest rates and very weak consumer confidence, we would expect that the recent broad slowing in growth in residential completions is likely to continue into next year.

● John Loos is the household and property sector strategist at FNB Home Loans.