More double-digit building-cost inflation on the horizon
08-05-2006
In spite of sharply decelerating house-price growth, building-cost inflation is likely to continue to show robust double-digit growth during 2006.
According to the latest report of Medium-Term Forecasting Associates (MFA); the BER Building Cost Index (BCI) is expected to grow by 13,2% in 2006. This is not much different from Rode & Associates’ forecast of 15,9% building-cost inflation, as published in the December 2005 issue of its bi-annual forecasting publication Rode’s South African Property Trends.
MFA reports that after reaching a high of 20,2% in the first quarter of 2005, the BER BCI (which includes the profit margins of contractors) moderated during the middle of 2005, but accelerated again in the final quarter to post an average growth rate of 16,9% last year. In contrast, the Haylett Index, which only reflects building-input costs like wages and materials, grew at a steady rate of 7% during 2005.
MFA’s Dr Johan Snyman says that the factors that underpinned building-cost growth during 2005 are likely to be sustained during 2006. These are low interest rates and inflation rates and robust real-income growth, resulting in buoyant house prices and booming construction activity. Whereas building in the housing sector might be slowing, demand in non-residential sector is on the increase. Thus, deteriorating tendering competition and labour and materials bottlenecks will remain.
The aggressive building-cost inflation forecast for 2006 is supported by MFA’s Qualitative Leading Indicator for the SA Building Industry, which leads an increase in building activity. This indicator combines 24 business indicators such as building activity levels, shortages of labour and materials, the degree of competition in tendering, employment and profitability trends, and the confidence levels of building contractors and sub-contractors.
Dr Snyman says that the slight decrease in building-cost inflation forecast for 2006 has nothing to do with fundamental factors, but ascribes it to the fact that building contractors had already widened their profits margins during the preceding year. “While there is bound to be further stretching of profit margins by contractors, we don’t foresee it happening to the same extent as during 2005, when the housing market peaked.”
Rode & Associates CEO Erwin Rode says that the strong growth in building costs bodes well for non-residential market rentals, as building-cost growth is the long-term driver of market rentals.
