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Insufficient demand for building work biggest constraint

30-10-2013

Insufficient demand for building work remains the biggest constraint to a rebound in building activity, which is stating the obvious when considering the current jaded state of the economy.

In one of its quarterly surveys, the Bureau for Economic Research (BER) asks a panel of residential and non-residential contractors to rate the current seriousness of three constraints, namely insufficient demand for building work, shortages of skilled labour and inadequate supply of building materials. As the corresponding graph shows, insufficient demand for work has, since 2009, caused contractors the most headaches. During the building-boom years (shaded area in the graph) demand for work was, naturally, not an issue. Back then it was a shortage of skilled labour.

Although having improved slightly, confidence levels among building contractors remain low. During the third quarter of 2013, half the contractors surveyed by the BER still rated current business conditions as unsatisfactory. Naturally, confidence levels among contractors will only improve on the back of strong demand for work. The graph that follows depicts the near-perfect inverse relationship between the metric insufficient demand for work and the sentiment levels of contractors. Note the sharp drop in contractors’ business confidence as the lack of the demand for work started to become an issue.

The reader should not be misled by the apparent ‘early green shoots’ of a potential recovery in confidence (as shown by the graph). We know that some valiant residential developers are groping their way out of the dark closet, but when interest rates start rising, the tentative recovery in house prices and house building will be aborted. In this respect, South Africa is at the mercy of the Fed. Of course the Fed can keep on kicking the proverbial can further down the street for quite a while yet, but sooner or later it must pick it up. After all, how long can you run an economy on zero interest rates?

Thus, our brave house developers face terrible risks, risks which are beyond their control once they push the button on a project.