MAIN IMAGE: Siphamandla Mkhwanazi, Senior Economist at FNB
Staff writer
Good news for estate agents is that the sentiment in the building sector, as measured by the FNB/BER Building Confidence Index, rose to 40, from 34 in 4Q2021. This marks the highest confidence since early 2018. However, the “core” building sector index (excluding hardware retailers and building material manufacturers) was at 31, from 27 in 4Q2022.
Main contractor confidence slipped to 25, from 30 in 4Q2021. However, the underlying activity indicator remained relatively stable.
In contrast, the confidence of building sub-contractors jumped by 17 index points to 47, its best level since mid-2018. This improvement in the business mood was underpinned by noticeably better activity.
“The results point to a strong showing in terms of smaller building projects, many of which would be considered alterations to existing structures rather than new buildings. Therefore, we are seeing more optimism from building sub-contractors than main contractors,” remarked Siphamandla Mkhwanazi, Senior Economist at FNB.
In terms of the market segments, activity among non-residential builders was markedly better, boosting confidence. A similar, although more restrained, trend was observed in the residential sector.
“Anecdotally, the better sub-contractor activity can also be linked to the increase in the number of office-to-residential conversions and alterations to existing homes,” added Mkhwanazi.
While building activity is broadly higher, overall profitability is still under strain. Profit margins are being negatively influenced by a range of factors largely outside the control of contractors. Among others, these include high and rising building material expenses and the cost of construction site interruptions.
The building pipeline remained stable this quarter, as such the confidence of quantity surveyors edged only marginally higher to 20 while that of architects was unchanged at 30.
According to Mkhwanazi the upside is that there was clearly more interest this quarter as reflected by the sharp rise in activity among architects at the very start of the building pipeline, namely, projects at sketch plan phase. There are, however, many more steps, including the financing of the project, before a project can commence.
Building material manufacturer confidence jumped to 55 in 1Q2022, returning the index to the level registered in 3Q2021. Production volumes on the other hand, faltered. Similarly, hardware retail sales declined in 1Q2022. This weighed on hardware retailer confidence, but, at 63, it is still well above the long-term average. “After the initial lockdown in mid-2020, hardware retail sales rose significantly, spurred on by the DIY market. These results show that the home improvement need has largely been satisfied for those who had the funds and trading is back to normal,” said Mkhwanazi.
The outlook is somewhat on the optimistic side. Not only are builders upbeat about the next quarter, the rating of new demand as a business constraint broadly eased.
In conclusion:
“If we look at the underlying survey data there is a clear recovery in building activity, especially smaller projects. While this is welcomed, in value terms, it may not be enough to boost the sector meaningfully. For a more sustained improvement, we need demand for new buildings to pick up from the current weak levels.” commented Mkhwanazi.
In the February survey for residential property and estate agents’ indications are that market volumes may have peaked but are still running above pre-pandemic levels.
The affordable market has shown the strongest relative recovery in activity following a more pronounced decline in 2020, due to the harsher impact of the pandemic on lower-income households.
In middle priced segments, buying activity remains strong, but growth is moderating. Activity is supported by lower interest rates, credit availability and pandemic-induced changes in housing needs.
Current buying activity is largely driven by demand recovery in the affluent markets, stoked by good pricing (value for money following significant price declines in recent years), the low interest rate environment, and the work from home (WFH) trend.
Despite slowing volume growth, the value of mortgage extensions continues to trend higher. This reflects a shift towards higher-priced and larger properties. In 2021, the value of outstanding mortgage advances grew by 6.3% compared to 2020, the fastest pace since 2008.
Data shows that in the first nine months of 2021, the average mortgage size approved was approximately 16% higher and the average property size approximately 6% bigger, compared to the same period in 2019.
Interest rates are set to increase by at least an additional 100bps this year, on the back of rising inflationary pressures and less accommodative global monetary policy conditions. While this may have a cooling effect on market volumes (and eventually price growth), it is important to distinguish that the current wave of buying activity is predominantly driven by buyers who are less sensitive to interest rate hikes.
The stagnant labour market, combined with rising interest rates, suggests a less supportive medium-term environment for home buying activity. However, factors such as the ongoing shifts in housing needs, relatively ample credit and higher incomes could mitigate the impact.
The outlook for the domestic homebuying market expects buying activity to remain relatively supported in the medium term and price growth should stabilise at lower levels compared to 2021, at around 3.5%, from 4.2%.
Higher interest rates will reduce affordability and the attractiveness of homeownership relative to renting. However, “marginal buyers” have already brought forward their buying decisions, taking advantage of ultra-low interest rates.
In the medium term, buying activity will predominantly be driven by less interest rate sensitive buyers, largely in higher priced brackets. Innovation and heightened competition among lenders should also boost activity. A key constraint is the stubbornly weak employment growth, which continues to lag the economic recovery.
Domestic rentals
After troughing at 0.6% y/y in March 2021, rental inflation has been gradually normalising, lifting to 1.1% in December 2021. Rental inflation is expected to lift to 2.0% on average in 2022, ending the year at around 2.5%.
This gradual normalisation is in line with the ongoing recovery in aggregate incomes and household demand, higher interest rates weighing on demand for homeownership, as well as improved mobility that might push people closer to business districts (for work). However, the pace of the recovery will be constrained by weak employment growth and rising cost of living.
