BUILDING COST GROWTH CONTINUES TO MODERATE

Business Day Posted to the web on: 30 August 2007: 16:59
Nick WilsonProperty Editor
RESIDENTIAL building cost inflation is continuing to slow, reflecting the slowing of the residential market thanks to rising interest rates and a slowdown in the economy, according to the latest First National Bank (FNB) commercial property finance residential building cost index.
FNB property strategist John Loos said yesterday the index, which was constructed by construction industry consultant Industryinsight, recorded year-on-year building cost inflation of 23,6% for the second quarter of this year. This was a further decline from the revised 29% registered in the first quarter of this year.
“The fact that it is slowing from a high of 38,5% in the fourth quarter of last year, I believe, is reflective of the slowing residential market conditions due to rising interest rates and some slowdown in the economy,” said Loos.
“The fact that it is still very high and that it was very high last year, as well, I believe, is reflective of supply side or input constraints,” he said.
Loos said these constraints included skills and material shortages, as well as the ability to acquire services related to property developments.
“These shortages have driven high building cost inflation despite the fact that demand for residential property is relatively soft compared to a few years ago,” said Loos.
He said an important factor influencing the supply side constraints was that residential property was increasingly having to compete with non-residential developments, as well as infrastructure projects, for these services, skills and materials.
Loos said he expected a further slowdown in residential building cost inflation until early next year. “But thereafter we will see a gradual recovery in the residential market and this, coupled with the accelerating infrastructure drive, leads me to expect significant building cost inflation over the rest of the decade.”
Property economist Francois Viruly, of Viruly Consulting, said the market had seen a “decline in the residential construction sector”. There was still a substantial risk that public sector infrastructure projects would “crowd out the private sector”.
“There will be projects in the private sector whose feasibility will become marginal, primarily driven by public sector projects, which absorb a lot of our materials, as well as skills in the industry. We have to be very careful that we don’t find a situation where, for example, we reach 2010 where we have the stadiums but the hotels have become unfeasible because of rising building costs. Looking ahead we need to find a careful balancing act,” said Viruly.
Another issue was that the lower end of the residential market had been showing price increases of about 40%. “W e have to be careful rising building costs don’t exacerbate that scenario making affordable housing increasingly unaffordable to first-time home owners.”