It is the season of quarter two indices being released, and for the most part the numbers have decreased, which is understandable given the economy’s most recent GDP figures. In the case of FNB’s BER building confidence index, it has seriously dropped, adding to the leading and lagging odds stacking against the country going forward. We collectively hope that all of the negative figures have mostly been exacerbated by the five month long platinum mining strike, but the truth is, despite its severe impact, there are other serious influences that we need to consider when assessing the situation. It seems that the property sector in South Africa has overrun itself, and that we just don’t have the buying power to support the growth. Breaking down the crux of the latest lacklustre index, is FNB Property Economist, John Loos, who makes it clear that things could go either way. – LF
ALEC HOGG: FNB’s second quarter BER building confidence index fell… It didn’t fall. It plummeted eleven index points, to 41 after it just lifted its head into the positive in the first quarter. John Loos, Property Economist at FNB is with us in the studio. John, it is a plummet. I’m not sure when last the index has taken such a knock. Looking at the long-term graph, you have to go back probably to the Financial Crisis to see a reversal like this.
.JOHN LOOS: Yes, back at the end of the…when the last recession came about… Alec, if one looks at previous confidence levels, I guess it is a bit of a surprise that it suddenly turns like this, because the industry didn’t seem to expect it a quarter or two ago. However, if you then look at the economic numbers and you see one quarter’s contraction already having happened and a possible second quarter contraction likely, then I guess it’s not as surprising. It’s a reflection of economic times and possibly even a lag reflection or a lagged impact of slowdown that’s been coming a lot longer. We have growth after the recession peaked in 2011 at three-and-a-half percent of GDP growth and have since then broadly, slowed for over two years now. Perhaps it’s been a long time coming, if one looks at it that way.
ALEC HOGG: So much for the NDP. That was supposed to go the other way. Zuma was supposed to create five million jobs. One wonders where the hell they are.
JOHN LOOS: Well, I think to turn big State organisations around that are struggling with their capacity…that’s a long-term process. You’re not going to do that in a quarter or two. You’re going to do that over a decade or two – perhaps more, more likely.
ALEC HOGG: This is the other way around. This is an indication I guess, from the industry – because it is a confidence index – that they see choppier periods coming, rather than the improvement, which seemed to have been on the cards if you read your index, ever since 2012. What caused this? Was it the platinum strike? The downgrade is a little too recent for that to have impacted. Where did it all come from?
JOHN LOOS: If you look at the non-residential side, both the non-residential and residential sides slowed in the quarter – more noticeably, the non-residential side. Perhaps, if one looks at it I mean there have been significant vacancy rates for a while in the area of office space, we’ve seen retails sales growth slowing for quite some time, so that may have been filtering through into retail. They can see rates as well, so we have built one or two shopping centres too many already. Already, if one looks at other numbers when they catch up…
ALEC HOGG: So they’ve all finally come to roost… The chickens have come home to roost. People say in the last quarter ‘oh my goodness, what have we done? Have we built too many shopping centres?’ Walk around Sandton where we work, and you’ll see that the Village Walk has been abolished or knocked down, so there’s going to be a new shopping centre right next door to CNBC – a huge tract of land that’s going to be developed as well. Are those guys taking a big chance or do they know what they’re doing?
JOHN LOOS: Perhaps we are getting a bit ahead of ourselves because when you have an economy that’s not growing it’s difficult to see where the purchasing power comes from. Certainly, real household disposable income growth is not strong, and that’s the purchasing power that drives the retail malls, so it’s tough to see where. You drive around, you see another centre going up, and you think ‘where’s the additional purchasing power’. Yes, perhaps this is it. Look, it’s early to say. It was quite a sharp knock, but it is only one quarter and from time to time, you can get volatility in one quarter, which rebounds straight afterwards. We’ll need another quarter or two, to see for sure.
ALEC HOGG: What causes the rebound from the sharp drop in the second quarter?
JOHN LOOS: As I say, a survey is not an exact science. It can just be certain data volatility, but I think it is possibly the start of a longer, broader multi-quarter downward trend, if we look at the recent economic numbers. The reality is that they’re just not looking good. The only thing is that on the residential side, building activity stayed low for quite some time. It hasn’t really rebounded very strongly since the recession a few years ago. In the existing property market, agents have been running into more and more stock constraints of existing property. Unless demand falls quite substantially, one would perhaps expect residential building activity not to drop too much, because I think we do need a little bit of extra supply.
ALEC HOGG: So house prices are stabilising at the moment. Is that what you’re saying?
JOHN LOOS: Well, in real terms there’s some house price growth. In estate agent surveys, which we’ve had over the last two years, an increasing percentage reported stock constraints. One would expect that if that carries on…certainly, not too much of a drop in confidence levels in building. You need some buildings.
ALEC HOGG: So ‘stock constraints’ means they don’t have enough existing houses to sell.
JOHN LOOS: Yes, but that being said, that could change. Demand for existing properties could conceivably decline and reduce those stock constraints.
ALEC HOGG: You’re being a real economist today.
JOHN LOOS: We just do have a weak economy.
ALEC HOGG: John, you’re being a real economist.
JOHN LOOS: Sorry, Alec.
ALEC HOGG: ‘The one hand’, and then ‘the other hand’. Overall, what you’re saying is there was a sharp decline from your index. This decline is one that we haven’t seen for some years – since the last financial crisis. You still don’t know whether it’s the beginning of a new trend.
JOHN LOOS: I suspect it might be the beginning of a declining trend, but a lot depends on things, for example ‘how quickly do we resolve mining sector issues and get the economy growing again’ – issues like that. We know this mining sector strike has had a significant impact. There’ve been electricity supply disruptions and manufacturing is helping that contraction in the first quarter. There are unknowns at the moment. Does Eskom get its act together? Does the mining sector strike come to an end anytime soon? If that’s not going to be the case and we continue contracting then this could be the start of a trend, which could go a bit deeper.
ALEC HOGG: Very complex, but they all pull together, don’t they? Thank you to John Loos, who’s a Property Economist at FNB, for joining the dots for us. Sometimes, those dots seem to escape those bigger pictures when you look at things overall, but you need someone to pull them together and property certainly does that. Well, thanks for being with us today. That’s all we have for you here in South Africa.
