Residential construction data from StatsSA in December 2024 captures weak pictures of this segment of the construction sector. However, the challenges continue, but as we approach 2025, there are indications that planned architectural activities may be framed towards positive growth.
Source: Supply. John Loos, senior economist at FNB Commercial Property Finance.
John Ruth, senior economist in commercial real estate finance at FNB, shows signs of stabilization amid continuing weakness.
“Latest data from StatsSA in December 2024 will strengthen the general weaknesses of the construction sector. However, despite ongoing challenges, there are new indications that have begun to show signs of recovery as planned building activities approach 2025.
Loos unleashes this new trend even further:
The latest StatsSA release showed a robust growth rate of 33.13% with the number of residential construction plans that passed the previous month's robust growth rate.
Given the volatility of monthly data, the three-month moving average provides a more clear trend. The fourth quarter change in 2024 reflects a moderate decline in 2024 -5.99% year-on-year change following a -4.57% decline in the three months to November.
Nevertheless, the recent decline has not been much more severe than in the beginning of 2024. The first quarter of 2024 saw a sharp -29.86% decline. This suggests that the second half of 2024 may have marked the beginning of housing planning level stabilization after a massive decline of nearly three years.
This long-term slump follows the aggressive interest rate hikes of the Reserve Bank of South Africa (SARB) totaling 4.75 percentage points from the second half of 2021 to May 2023. However, the recent 75 basis points reduction since September 2024 could still help stabilize the market with low levels of activity.
Currently, the passed residential construction plans are significantly lower than just before the interest rate hike, with a cumulative decline of -46.7% from the three months between December 2021 and December 2021.
The residential building is complete
Residential building completions continued to decline sharply, down -40.96% year-on-year in December 2024 and -34.63% in the fourth quarter of 2024.
Plans given by size category
When breaking down plans by construction categories:
Houses with homes over 80 square meters (independent) fell -4.9% year-on-year. Flats and townhouses: experience a more significant decline in dwelling houses under 80 square meters. However, this is the smallest and most volatile category.
Long-term data highlight the transition to flats and townhouses, reflecting the need for more efficient urban land use as rarity increases. These home types usually have a smaller average stand size per unit.
The share of flats and townhouses in the total housing programme increased from 11% in 1999 to 47% by 2024. This trend, driven by an increase in demand for space-saving housing and a decrease in the construction of freestanding housing under 80 square meters, could underscore the challenges of South Africa's affordable housing initiatives.
Cyclic Segments as Economic Indicators
The combination segment of “flats and townhouses” and “freestanding homes over 80 square meters” is usually more periodic and reflects the trends of a wider business cycle.
SARBs include these segments in the combined reading business cycle indicator because they have predicted values. In December, these segments experienced slight year-over-year growth of 7.99% in construction plans.
However, in three months of viewing in December, it was down -9.79% year-on-year. A decline in the magnitude of the decline suggests that potential markets will bottom out. This trend, which rose 2.4% year-on-year in November 2024, alongside the SARB composite reading indicator, suggests that the economic situation in early 2025 will gradually improve.
Outlook
The December 2024 data points to the continuing weaknesses of the housing construction sector, but there are signs that the market may have bottomed in 2025, with potentially moving towards aggressive growth.
FNB's economic growth forecast for 2025 improves the expected sub-1% rate for 2024. With two additional interest rate cuts of 25 basis points, we are quickly anticipating two 25 basis points, SARB's overall rate reduction strategy could provide mild support for housing demand. In 2025, it is expected that the residential building plans passed to achieve moderate growth of 5-10% in 2025 were passed.
Challenges for recovery
A key constraint on the recovery is the rising costs of construction that affects housing affordability. The average of the passed plan showed a minimum inflation rate of 0.7% in the final quarter of 2024, while the inflation rate for completed units accelerated to 8.19% year-on-year over the same period.
In summary, we forecast mild growth in building activities in 2025, supported by economic improvements and low interest rates, but the environment remains challenging. Cost management is important to ensure the affordability and sustainability of new housing developments.
