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Monday Nov 25, 2013

Fewer new properties may prompt price surge

The noticeable slowdown in residential building activity in the third quarter might lead to a future acceleration in house price growth.

John Loos, a household and property sector strategist at FNB, said on Friday a further acceleration in house price inflation from the most recent rate of 7.8 percent year on year, which had been driven by already elevated existing home stock shortages, might be the near-term outcome of lowerthan-expected levels of residential building completions in the third quarter.

This would contribute to existing home prices 'getting ahead' of building cost increases, contributing in turn to some moderate narrowing in the replacement cost gap and perhaps resulting in a more noteworthy rise in the level of building activity next year.

The replacement cost gap is the percentage by which the average home replacement cost exceeds the average existing home value.

Loos said FNB continued to project slightly better building completions growth for this calendar year. Its previous expectation of 7 percent had been reduced to 3.1 percent.

This was because of the weaker-than-expected residential building activity in the third quarter in terms of completions and plans passed, and assuming a flat final quarter.

The year-on-year growth of building plans passed slowed to 2.1 percent in the third quarter from 18.8 percent in the second quarter while the year-on-year growth rate in square metres of buildings completed slowed to 2.1 percent from 9.8 percent in the same period.

Loos added that it was only an increase in the average size of units built and planned that kept the growth in square metres positive in the third quarter. The number of plans passed for units declined yearon-year by 5.7 percent and the number of residential building units completed dropped by 8.9 percent.

However, FNB expected further growth to resume next year because of the existing home stock constraints and anticipated a moderate growth rate of 5 percent for the year.

Loos said this may have to be accompanied by slightly stronger existing house price growth. A house price inflation rate of almost 9 percent next calendar year appeared more realistic based more on residential stock shortages than any major surge in residential demand from current levels.

Existing house price growth at this level would exceed consumer price inflation, which was expected to be just below 6 percent, he said.

Loos said 15 percent of respondents to FNB's estate agent survey in the third quarter cited stock constraints as a key factor influencing their perceptions of near-term residential market activity.

The ongoing mediocre levels of residential building activity could perhaps largely be explained by a still competitively priced existing home market relative to new house prices.

From 2007 up until early last year, there had been a significant widening in the replacement cost gap, which was caused by a decline in existing house prices in 2008/9 and very weak price growth thereafter, and rising building costs during much of that period.

He said the rising replacement cost gap trend had flattened out from early last year but still remained 'at a very significant 22.6 percent'.

This meant it remained a challenge for the new development sector to bring greater quantities of competitively priced newly built stock to the market. He said the replacement cost gap remained at a point where once again the level of building activity had, in recent times, been too low to prevent a rise in existing home stock constraints.

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