Growth in residential building activity flattened in late 2015 – FNB
Growth in Residential Building Activity flattened out late in 2015 reports John Loos, FNB Home Loans household and property sector strategist, in the bank’s note on the December Residential Building Stats
Residential building plans as a leading business cycle indicator
The South African Reserve Bank finds the number of Residential Building Plans Passed for Flats, Townhouses and Dwelling Houses Larger than 80 Square Metres, to be a useful Leading Business Cycle Indicator. As such, this data is included in the SARB’s Composite Leading Business Cycle Indicator along with a host of other data.
This implies that this grouping of Residential Building Plans Passed can be a useful indicator of the direction of the economy’s performance in the short term.
For the 4th quarter of 2015, this indicator’s year-on-year rate of change slowed further to decline by -5.2%, from the 3rd quarter’s +0.7%. This is well down after a slide from a high of +17.4% as at the 3rd quarter of 2014, and probably continues to point to economic weakness ahead.
The main stats
Getting to total building activity, including Dwelling Houses Smaller Than 80 Square Metres, for December 2015, square metres’ worth of residential buildings completed grew by +2% year-on-year. This represents a weakening on the prior month’s 7% increase.
However, as monthly data is volatile, we prefer to analyse trends through smoothing the data with a 3-month moving average. Here we also see a continuation of the recent slowing growth trend in completions. For the 3 months to December, year-on-year decline of -1.33% represents a further slowing in the rate from the +2.3% increase for the 3 months to November. This growth is markedly lower than the +28.8% year-on-year high recorded for the 3 months to June 2015.
The 3 month moving average for square metres’ of Residential Plans Passed, too, has been weak. When we smooth the volatility, from a 15.23% high for the 3 months to April 2015, growth in square metres’ worth of plans passed has slowed to a -4.03% year-on-year decline for the 3 months to December.
A similar weak growth picture is witnessed when examining the actual number of residential units completed, as opposed to the square metres. Here, we saw a decline in the year-on-year growth rate from +18.7% growth in November to -7.8% decline in December 2015. Smoothing out the month-to-month volatility using the 3 month moving average, we also saw slower growth to the tune of a -3.75% year-on-year decline for the 3 months to December, from +2.24% growth for the 3 months to November.
Therefore, the period of positive building completions growth that dates back to late-2014 appears to have all but petered out, monthly data volatility aside.
All in all, though, 2015 was slightly better on the building front than 2014, with the number of residential units completed for last year as a whole growing by +4.3%, compared with a -8.3% decline for 2014 as a whole.
The level of building completions remains moderate compared to the boom time peak reached late in 2005. Whereas for the 3-months to December 2005 2.706 million square metres were recorded as completed, the 3 months to December 2015 recorded 1.420 million, just over half of the late-2005 peak level.
Average value of newly built homes
Building costs have for a while appeared to limit the ability of the Development Sector to bring “competitively priced” new homes to the market. For the 3 months to December, the year-on-year average value of units completed rose by 7.75%, and of plans passed by 3.07%.
This inflation rate is noticeably lower than the high of 20.8% year-on-year for units completed, recorded in May 2014, but remains in rising territory nevertheless. However, low inflation in the average value of plans passed suggests a more aggressive drive to contain home affordability, in tough economic times, moving forward.
We haven’t, however, seen strong signs of the start of the development sector’s attempts to address affordability constraints by reducing the average size of homes built. From 135.6 square metres for the 3 months to September, the average size of units completed declined only marginally to 129.8 square metres for the 3 months to December.
In short, therefore, Residential Plans passed, excluding dwelling Houses smaller than 80 square metres, can be a useful leading business cycle indicator, and their broad year-on-year decline in the final quarter of 2015 points to further near term economic growth weakness.
Simultaneously, residential building stats reflect economic and property conditions. Various of our FNB property economic data points towards slowing demand and easing residential supply constraints in the existing home market of late.
This, along with Plans Passed growth having been broadly weaker towards the end of 2015, suggests slowing level of building completions to come in 2016.
Increasingly financially constrained times also lead us to expect a smaller average size of home to be built in 2016.