Travails of the new SA building cycle By Cees Bruggemans, Consulting Economist [email protected] 2 July 2013 Some generations have all the luck, born in prosperous times, going through a boom in their working life, retiring peacefully in tranquil aftermaths, and gone before the pawpaw hits the proverbial fan. It is nice to live through the ascendancy of a genuine Minsky cycle, but absolute hell to encounter the moment of truth and the great leverage unraveling which then follows as night does day. Ours is a generation that only heard about 1929 and its 1930s (and about an even vaguer 1870s and 1830s), kind of wondering what it must have been like, never dreaming it would happen again (yet this the only constant in the Minsky reading of financial life). So we had another great global financial unraveling in 2007-2008, made more complicated by the European existential sideshow and further enlivened by uncertain Chinese rumblings throughout. We are now in the long shadow thrown by its aftermath, marked by slow growth, structural shortcomings in many countries, the repair of banks, households and country balance sheets, and desperately wanting to get back to a more normal economic behaviour, where the capitalist market system generates periodic cyclical patterns which lend itself to analysis and predictability. None more so than housing and building cycles generally, guided as they mainly are by population growth, credit and interest rate cycles. But the repair and recuperation of Great Financial Crisis aftermaths are drawn-out affairs. Before one can really say normal cyclical behaviour has returned, there can be an interim in which abnormal, non-standard jumping around may be the norm rather than the exception. South Africa is an open economy, going by its economic trading, financial flows and human interaction. Just as the world was thrown off course this past decade by global crises, so in turn SA was thrown off course, and within this larger story we must still allow for SA internally creating its many supply constraints. And within that greater context the SA building industry experienced its own idiosyncratic meandering. It makes the art of business forecasting so much more difficult, for there is temporarily no regular cyclical pattern to go on. Instead, there are these disjointed bits of behaviour that remind of a Churchillian description of Russia (a riddle wrapped in a mystery inside an enigma). The facts about the building industry in recent years are easily summarised. Boom conditions during 2004-2007 ended abruptly in the disastrous year 2008. On hitting bottom in 2009, residential building activity essentially moved sideways at half normal pre-crisis levels. Non-residential building activity (offices, industrial, warehousing, retail space) hit bottom a year later, mostly because its projects are larger and of longer duration. The atypical aspect was not the preceding boom or the bust of 2008-2009. Instead, it was the long marooning at the cyclical low for at least four years now. It reminds of apartheid crisis years in the 1980s rather than normal post-recession patterns (where one would expect building revival to coincide with the broader economic recovery). Over the past year, there has been a slight lift in residential activity, also reflected in rising FNB/BER building confidence levels from extreme recession depths. But this belated building lifting is occurring within an economy that experienced only one, at most two, normal recovery years (between mid-2009 and mid-2011). Even this supposed normality can be questioned, for the export recovery remained mostly extremely poor (whereas our EM peers generally did better, suggesting it was not all due to global conditions). Also, domestic confidence (as monitored by various BER surveys) did not recover quite as speedily as expected from earlier cycles. And the household income and consumption recovery had exceptional elements, such as strong terms of trade gains and growing use of unsecured credit while mortgage debt growth remained in abeyance. The past two years saw the global cyclical upswing losing momentum nearly everywhere, and South Africa paralleled this phenomenon, partly for external reasons but also importantly for its own internally generated reasons. Looking back, the world has so far only half-heartedly recovered from the 2007-2008 Great Shock, and SA has had a very uneven, subpar four year business upswing. Within this context, the building industry experience of staying at recession activity levels for four years stands out. But even more surprising of late is the apparent revival that is starting to take a hold in the building industry even as the broader economy has been losing momentum for two years, within a global context of limited growth. With household real income growth dwindling, debt levels still high and the economy generally giving the impression of struggling, one would not generally expect to see a belated building pickup getting underway. Traditionally, the change in building activity trails closely the change in new car sales. With year-on-year new car sales growth having peaked in 2010, and ever since slowing down, the acceleration of late in building activity outperforming the motor industry suggests an imminent topping out in building recovery before it has properly got underway. So far, so bad, so sad. The enigma inside the mystery, however, is that after a five year starvation diet, the banking system appears to be easing up slowly on its mortgage lending criteria even as it has started tightening on unsecured lending. Whereas new car sales benefitted from the unsecured lending buildup, the building industry has been kept short by the long drought in mortgage growth. Also, demographics did not stand still during the past five years, with population growth, immigration gains, slowing emigration, increased urbanisation, and some job recovery even as household debt levels eased relative to income and interest rates fell to 35 year lows. Implied is a steady increase in pent-up demand, and easier financing conditions. Still ongoing unsecured lending and a modest pickup in mortgage lending would support somewhat faster building activity. It fits the profile of the past 12 months. But what kind of future does this have? The pickup in non-residential activity seen so far suggests a normal building recovery to be underway, but it needs to be predicated on a normal economic expansion. The latter is not quite there at present, and may go missing for longer, given global and local developments. This does not suggest a strong continuation of non-residential building recovery. On the housing side, the distortion of bank lending of recent years, with minimal mortgage growth and maximum unsecured lending expansion, and this now gradually starting to unwind and another role reversal potentially shaping, if perhaps only very modestly, suggests that more finance could be made available for building activity even in economically underperforming times. Then again, any recovery is from low levels, the mortgage tap may only be modestly opened, and within a year the interest rate cycle could potentially have turned against homeowners if market forward rates tell a story (though tempered by SARB Governor remarks in recent speeches). It sketches the hurdles ahead for both residential and non-residential building activity. Preferably, one would like to see a cyclically deleveraged household sector, with the interest rate cycle turning positive (going lower for some time) and a normal vigorous economic upswing generating new jobs and healthy new income growth. That is the basis for a strong building cycle recovery. But that is not what we have, not internationally (tepid, probably still for some time), locally (already very modest and apparently still losing momentum, who knows for how long), a banking system relenting on mortgage lending criteria but probably only very modestly and very slowly, household debt levels off peak GDP-ratio levels but still intimidating high as many still try to deleverage, and an interest rate cycle possibly coming to the end of its easing phase before entering a rising phase. Within this enigma it may still be possible to lift building activity levels from their low suppressed levels, and do this at variance with the broader economic cycle, for the reasons given, but one senses a ceiling to such growth potential. What we need for a healthy long-term building trade revival, besides demographic pent-up demand, is a return of more healthy, normal cyclical growth conditions in the broader world, and in the wider South African economy, and with critical parameters (such as interest rates) not becoming a problem shortly. Such a breakthrough, however, may be some time coming. Cees Bruggemans Consulting Economist [email protected] Twitter sound bites @ ceesbruggemans Register for free e-mail articles fnb.co.za/economics
Posted on: Wed, 03 Jul 2013 07:33:56 +0000
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