Credit risk up in building industry

Although economic growth figures in the building industry for 2007 were impressive at just over 5%, it is evident that the economic climate is changing.

Economic activity has slowed on the back of declining consumer spending. The increase in interest rates, electricity supply problems and increase in commodity prices are impacting the economy. Unlike two years ago, the economy is no longer steaming ahead. Spending cuts have been introduced in stages and credit growth is decreasing.

Household spending growth is expected to halve from its level of 7% - 8% in 2007 to 3,5% to 4% this year. Real fixed investment growth is now expected to halve from 16% last year, with the spreading weakness led by lower residential and non-residential building activity, mining and commercial vehicle fixed investment.

Household cut-backs are now spilling over to fixed investments. Large credit purchases being put on hold as a result of growing affordability problems and rising concerns of when interest rates may again go up. Not only have furniture appliance and car sales experienced spending cut-backs, but new house building is also being affected.

Building plans passed for new houses levelled off late last year and are now declining, suggesting a turn for the worse in actual building activity as 2008.

About 5% to 8% fewer houses are expected to be built this year. The developing weakness could also partially be traced to municipalities increasingly experiencing problems in supplying bulk services such as electricity and sewerage to new residential developments.

Developers are also being negatively affected by increased interest rates, combined with the increased cost of building materials and problems experienced with service providers and government departments.

It is anticipated that the number of residential buildings completed this year will decline between 5% and 10%. Even non-residential building plans passed have declined, despite this sector expecting to show an upturn.

Some economists are however still quietly positive. Despite slowing, the economy is still recording growth around 4%, which is solid by historic standards. Urban land scarcity is mounting as demand for residential, commercial and industrial property is grows steadily.

The combination of high building-cost inflation and land-price inflation, caused by these supply constraints together with healthy long-term residential demand, is believed to be the force behind house price inflation.

It is also believed that the lower end of the housing market will continue to outperform the higher priced end of the market. Demand in the lower segment should continue to be a focus area. The affordability of housing, especially for first-time buyers in the low and middle income groups, are being negatively influenced by the interest rate hikes.

Consumer spending power has also been further eroded by increased food, fuel and energy prices. It is believed that in the short term the housing market will continue to slow. This over time will have a positive effect on the rental market, pushing up rentals, which will ultimately force tenants to consider buying property instead of renting.

By Wayne Basson industry analyst, Coface