Residential building cost continues moderating trend in 1st quarte of 2009

The FNB Residential Building Cost Index showed year-on-year inflation of a mere 1.4% in the first quarter of 2009. While this appears moderate, it appears to still be well-above existing house price deflation, which according to the FNB House Price measure runs at -10.2% in April. In the context of existing house price deflation and very weak demand, even this low house price inflation becomes very significant in exerting pressure on the building industry's performance.

Given the expectation that national house price deflation may remain in place for most of 2009, the differential between input cost inflation and house price deflation may only start to narrow towards 2010, making it extremely tough for contractors to deliver new stock to the residential market. The negative aspect to this is obviously from a developer/contractor point of view. However, the positive side to it  the maintaining of a higher replacement cost of housing (i.e. the cost of acquiring new houses) relative to the price of existing property  is crucial in keeping the market in some sort of balance, of at least slowing supply until demand can catch up to restore the balance.

The result of the expected continuation of some sort of differential between input cost inflation and  house price deflation in 2009 is expected to be further decline in the volume of residential buildings completed, as contractors battle to reduce input costs in order to keep up with expected ongoing house price deflation for most of the year.

On the commercial property building side, whose building cost index showed only 0.01% year-on-year inflation, one can see the signs of a general market weakening too. While office and industrial space have held up relatively well until not so long ago, it is likely that these sub-sectors will all see downward pressure on their building cost inflation rates as the whole commercial sector slows on the back of the current economic recession.

Economy free falls to 6.4% drop in 1st quarter of 2009

GPD Growth slows to -6,4% in the 1^st quarter of 2009, officially putting the South African economy in a "serious" recession, following the -1.8% growth reported in the last quarter of 2008. The only economic sector that reported positive growth in the first quarter was the construction industry, but here to growth slowed from 10,8% in the last quarter of 2008 to 9,4%.  Given the expected slowdown in private sector expenditure affecting investment in housing and other buildings, investment in construction is expected to slow further.  The sharper than expected downturn in the economy, will support more aggressive easing of monetary policy in May 2009, as analysts widely expect another 100 basis point cut lowering the repo rate of 8,5%.