House building to recover this year, but not as much as hoped

House building to recover this year, but not as much as hoped

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CAPE TOWN – RESIDENTIAL building activity is expected to grow strongly this year off last year’s low levels, but don’t expect fireworks, according to FNB’s Property Insights.

FNB commercial property finance strategist John Loos said yesterday overall building activity numbers suggested that while the residential development sector might grow strongly this year compared with last year’s low levels, overall growth for the year might only come in at the same levels as pre-Covid 19.

“Perhaps some had expected a little more new activity in the pipeline than what the overall numbers suggest, given recently strong home buying. The home buying surge came in response to last year’s aggressive interest rate cutting by the South African Reserve Bank (SARB),” he said.

The number of residential units’ plans passed declined year-on-year by 16.57 percent. This came after the negative year-on-year growth rate had been clawing its way back from a 73 percent year-on-year drop during the “hard lockdown” of the second quarter of 2020, to near 0 percent by the final quarter of the year.

Residential units completed went into mild positive year-on-year growth territory by 9.02 percent in the first quarter of 2021, but renewed decline in plans passed suggested that strong levels of completions should not be expected in the near term.

Other metrics of new building activity make the building picture look mildly better.

Square metreage of plans passed was in slightly positive territory due to an increase in the average unit size of these plans.

Also, the more cyclical part of the market was seeing building levels respond to an increase in home demand due to interest rate cuts last year.

The “more cyclical part of the market” referred to the number of units excluding the free standing homes smaller than 80sqm. This small free standing home category represented largely the most affordable end of the market, and is not as strongly influenced by economic and interest rate cycles.

Excluding this category, first quarter numbers pointed to an 18.1 percent year-on-year growth rate in number of units’ plans passed, and a more significant 37.2 percent increase in the number of units completed, in the first quarter..

This included an increase in units’ plans passed in “Flats and Townhouses” by 14.4 percent (with units completed a massive 80.4 percent), and a 25.5 percent increase in the number of “dwelling houses” larger than 80sqm (but units completed still 14.5 percent down).

The decline in the total number of units plans passed was due to a sharp 74.2 percent drop in the “dwelling houses smaller than 80 sqm” category (and a 40.9 percent drop in units completed).

This was largely in the affordable housing side of the market, with an average value on plans passed of R366 000 per unit.

The more cyclical categories of residential building activity were responding to last year’s interest rate cuts and the resultant uptick in home demand.

This shift in the building activity away from the most affordable category towards the two higher valued segments, “Flats and Townhouses”, with an average value at R826 000 per unit for plans passed and “Dwelling Houses Larger than 80sqm” at R2.14 million per unit appeared to be driven by market activity, which was at its strongest in the “Middle Segment” of the housing market.

According to the FNB Estate Agent Survey, the agents’ Market Activity Rating was at its strongest in what it classified as the “Middle Income Segment”, where homes were valued on average between R1.6m and R2.6m.

The most affordable segment, with an average home value below R750 000, recorded a lower 6.51 rating.

“After last year’s total decline of 46.7 percent in the number of residential units completed, we project a very strong positive growth rate of 80 percent for the entire 2021. However, that would not translate into a strong level of completions by historic standards, being insufficient to bring the number of completions back to pre-Covid-19 2019 levels,” said Loos.

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