StatsSA's residential building statistics show that the sector continues to battle

There was mild positive growth in the square metre-age of residential buildings completed, to the tune of 5.5 percent year-on-year in July, a jump from negative growth of -15.7 percent in June.

However, as monthly data can be volatile, they prefer to smooth it by using a three-month moving average. Here, square metres of plans completed showed a -1.92 percent year-on-year decline for the three months up to and including July, which is significantly slower than the year's high point of +7.4 percent reached in the three months to February 2012.

Some growth in affordable housing

The segment with growth faring the best recently is the "Dwelling Houses Smaller than 80 square metres in size", the growth for the three months to July being +7.3 percent year-on-year in terms of square metres completed. This would suggest some growth in the so-called "Affordable Housing Segment".

By comparison, completions of Dwelling Houses Larger than 80 square metres grew by 2 percent year-on-year for the three months to July, while Dwelling Houses less than 80 square metres in size saw completions decline by -9.8 percent.

Examining building plans passed, a useful leading indicator of the near-term future direction of building activity, the picture appears somewhat bleak. In July alone, the year-on-year growth in square metres of building plans passed was negative to the tune of -13 percent year-on-year, following on a -24.8 percent negative rate in June. This suggests some further weakness ahead.

Widening replacement cost gap

The building sector is challenged by a mediocre and well-supplied existing home market, and a widening in the replacement cost gap in recent years. Building cost inflation that has outstripped low house price growth in recent years has widened the replacement cost gap to 23 percent, i.e. the FNB valuers' estimate is that average replacement cost of an existing home is 23 percent higher than the existing home's value, as at valuation date.

This significant replacement cost gap, in a time of still-significant household financial pressure, makes it tough for the residential development sector to bring new stock to the market that can easily compete price-wise with the existing home market.

This replacement cost gap, and a currently slowing economic and real household disposable income growth rate, leads to the expectation that the remainder of 2012 could see further decline in the square metres of buildings completed.