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Residential building plans passed turns sharply negative in October

Residential units plans passed for units over 80 square metres is a useful leading economic indicator, and like most other indicators of late, it was pointing down in October, reports John Loos, FNB Home Loans household and property sector strategist.


For the month of October, square metres’ worth of residential buildings completed declined by -13% year-on-year. This represents a weakening from the prior months’ positive growth of +14.6%.

However, as monthly data is traditionally volatile, we prefer to analyse trends through smoothing the data with a 3-month moving average. Here too, though, we see a weakening in growth to 2.76% year-on-year in October, from a previous 7.4% for the 3 months to September.

The 3 month moving average for Square Metres of Residential Plans Passed, too, has been recording slowing growth, from a positive +1.2% year-on-year for the 3 months to September to a drop of -7.7% for the 3 months to October.

A similar picture is witnessed when examining the number of residential units completed. Here, too, we saw a slowing in the year-on-year growth rate from a positive +12.2% in September to a -23.2% decline in October.

And smoothing using the 3 month moving average, we see a continuation of the growth slowdown from +2.3% year-on-year growth for the 3 months to September, to -2.7% for the 3 months to October.

In short, the 2nd half of the year has brought a slowing growth rate in residential building completions.

And so, residential building completions chug along at a level around half of what they were back at the height of the building boom. 1.317 million square metres of residential space were completed for the 3 months to October, compared to 2.706 million completed for the 3 months to December 2005.

While the currently moderate level of building activity is not great news for the Development Sector, it is crucial to maintaining a reasonable balance between demand and supply in the Residential Market at a time when the economy is at high risk of recession going into 2016, and residential demand could be slowing.


Building costs have up until recently appeared to limit the ability of the Development Sector to bring “competitively priced” new homes to the market. For the 3 months to October, the year-on-year average value of units completed rose by 8.1%, and of plans passed by 1.8%.

This inflation rate is, however, noticeably lower than the high of 20.8% year-on-year for units completed, recorded in May 2014.

The building cost constraint, however, may be starting to ease a little. Building Materials Cost inflation, as per the PPI for Building materials, has slowed all the way from a high of 8.4% year-on-year in October 2013, to deflation of -3.97% year-on-year by October 2015.

Despite the challenge of competing price-wise with existing home values, the past few years of a reasonably positive housing market environment has seen an increase in the average size of homes completed, from a low of 105 square metres for the 3 months to April 2013 to 134.5 square metres for the 3 months to October 2015.

This reflects something of a loss in “market share” of the category “Dwelling Houses Smaller than 80 square Metres”, suggesting that building in the higher priced markets has grown a little faster than that in the so-called Affordable Housing Markets since around 2012.


Given the likely continuation of the broad multi-year slowdown in the country’s economic growth, gradually rising interest rates and very weak Consumer Confidence, we would expect that the recent slowing in growth in residential completions is likely to continue into 2016.

We would also expect to see the start of a move towards a smaller average size of home built in 2016, which would better reflect the financially constrained Household Sector.

Also important is to consider what the latest residential building stats are signalling with regard to near term economic prospects. Residential Building Plans Passed, excluding “Dwelling Houses smaller than 80 square metres”, have long been used by the Reserve Bank as one of the Leading Indicators in its Composite Leading Business Cycle Indicator. And its October year-on-year growth rate turned sharply negative to the tune of -21.3%. The smoother 3-month moving average also turned negative, recording a year-on-year drop of -11.63% for the 3 months to October, down from a +0.71% positive rate for the 3 months to September.

This, along with year-on-year contractions in other key sectors such as Mining, Manufacturing and Electricity Sales in October, serves to add to the expectation that we are heading for a weaker economic growth period in the near term.


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