Building slowdown will support home prices

More homes were completed in the first two months of this year than in the same period of 2018 (+6,2%), but the number of plans approved for future home building fell by almost 20%, and this will underpin home prices going forward because there will be less supply of new stock coming on to the market.

Absa property analyst Jacques du Toit also reports that it is really only the flats & townhouses sector (which accounts for around 28% of residential building activity) that is showing any significant growth at the moment in terms of both units completed and plans passed. The number of new flats and townhouses completed in the first two months of this year showed a 14,4% y/y increase, while the number of plans passed for such homes was 4,8% up.

Stats SA figures show that on a regional level, Gauteng, KZN and Limpopo were actually the only provinces where the number of plans approved showed an increase during the first two months of this year, while the number of homes completed increased in all provinces except the Free State, Northern Cape and Western Cape.

Building activity with regard to alterations and additions to existing homes slowed dramatically (-19,7% y/y) during the first two months of the year, in line with the mounting pressure on household finances. The building cost of completed alterations and additions showed a real-term (after inflation) increase of 3,9% y/y to R7543/sqm.

The average cost of new builds, while higher at R7793/sqm, actually showed a 0,6% y/y decline in real terms during this period - although there is a large variance by sector. Du Toit says the average building costs in the three categories of new housing were:

• Houses smaller than 80sqm - R5918/sqm;
• Houses larger than 80sqm - R7630/sqm; and
• Flats & townhouses - R8224/sqm.

He also says that against the background of general economic conditions and prospects, residential building activity is expected to remain under pressure over the short to medium term.

Meanwhile, the latest Absa Housing Sentiment Index shows that despite the financial pressures and political uncertainties confronting most households at the moment, overall positive sentiment regarding the residential property market is at 73% ahead of the elections this month. And while home prices remain flat or very slow to move in most areas, the latest figures from the Reserve Bank show that mortgage lending is continuing to show growth, with a 4,2% y/y increase at end-March compared to a 4,1%y/y increase at end-February, and a 4,5% y/y increase expected by the end of the year. This indicates a greater volume of trading which will also start to boost prices once the current surplus is absorbed.