Houses: buy, don't build

Johannesburg - Residential building cost inflation has continued to slow down by measuring 1.4% in the first quarter of 2009. This is down from 6.3% in the previous quarter, but still higher than house price deflation of -10.2%.

"While the 1.4% figure appears moderate, it is still well above existing house price deflation, which runs at -10.2% (according to FNB's house price measure) in April," said FNB Property strategist John Loos.

In the context of house price deflation and weak demand, even this low figure becomes significant in putting pressure on building industry performance, said Loos.

Building cost inflation, as measured by FNB Commercial Property Finance's residential building cost index, shows the average building cost per square metre charged by building contractors in the formal residential property sector.

Loos said this reflects contractors' pricing power and input costs, as determined by market conditions. It excludes low cost housing.

The average building cost per square metre was R5 941 in the first quarter.

The inflation rate is now a far cry from the 38.8% recorded during the last peak in the third quarter of 2006. According to Loos, the figure shows weak residential demand, deflating house prices and low contractor pricing power.

"Also contributing has probably been a general decline in commodity prices, which should place pressure on price inflation of certain building materials."

Given the expectation that house price deflation may continue for the rest of 2009, the difference between input cost inflation and house price deflation may only start to lessen towards 2010, making it tough for contractors to deliver new stock.

The only upside is that this may cause supply to slow down, until demand can catch up to restore some sort of balance in the market.

Commercial property building inflation remained almost flat at an increase of 0.01% year-on-year.

- Fin24.com