Despite 2009 being a woeful year for the residential building sector, 2010 will be a better one, although this improvement will only occur in the second half of the year.

FNB Home Loans said on Thursday that December StatsSA building stats showed that for 2009 as a whole, the square metreage of residential buildings completed declined by -23,2%, while that of plans passed fell by an even greater -40,4%.

For the final quarter of the year, the numbers continue to point towards an extremely weak picture for the residential building sector, but perhaps there is just a hint that activity may be starting to hit the bottom and level out. In the 4th quarter, square metres of building completed declined by -31% year-on-year (y/y), slightly better than the previous quarter’s -34%, while y/y decline in building plans passed diminished more significantly from -49% in the third quarter to -22% in the final quarter of 2009.

Moreover, FNB said 2010 will be another tough year for the residential building sector, and for the year as a whole, expect growth in completions to be in the region of 0%.

This, however, would imply an improving level of activity as the year progresses, with the worst part of the year being the first half, including more y/y decline, while the second half is expected to see some positive y/y growth off what is now a very low base.

Some recent decline in building materials costs has possibly helped to lessen the gap between replacement value and existing house prices slightly, while renewed price inflation in the existing home market is expected to narrow the gap further.

This narrowing makes it easier for developers to bring “competitively-priced” stock to the market. “However, one cannot expect it to be an easy ride just yet, as existing house price inflation remains low, and there is a high number of distressed sales in the existing home market, often representing ‘bargains’ for the home buyer,” FNB said.

Actual square metreage of residential completions gives a perspective of by how much building activity has been cut back since the 2005 peak. In 2005, 14,211,337sqm of residential units were recorded as completed (102,258 actual units completed) by StatsSA, a cumulative rise of 129,6% from the previous low of 1999. From 2005 to 2009, the cumulative drop has been as spectacular, amounting to -57,3%, to 6,071,839sqm (84,508 units), a level lower than the 1999 low point.

The tighter market since the 2005 peak, owing to affordability issues, has also caused something of an “economy drive”, with average size of home completed declining from 141sqm in the third quarter of 2006 to 117sqm at end-2009.

The reduction in average size has not been nearly as extreme as the one in the late-1990s, where the average size of a unit completed reached as low as 63sqm in May 1999, but this has been due to the boom of recent years having resulted in a greater oversupply of new stock in the smaller-sized segment of the market, and thus a sharper cutback in building activity at the smaller-sized end as a result.

FNB says it has been their contention for some time that the smaller-sized “two-bedroom and less” sectional title market was a big target of the more cyclical buy-to-let and first-time buying during the boom years, and building stats seem to show that the development sector responded accordingly.

Although we believe that the smaller-sized unit will be far more in demand in years to come, it is likely that the market got ahead of itself temporarily, and that this building frenzy in the flats and townhouses segment was “too much too soon”.

The situation has been rectifying itself gradually since 2008, with the percentage of completions being flats and townhouses having declined to 28,4% by end-2009, and this in a far thinner overall market. – Eugene Brink

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