The 'Great Property and Building Advance of the Present Era'?

The past five years have been tough, with the building trades entering a sharp decline from 2007 and then finding themselves in a protected recessionary trough. Confidence of building contractors remain at low levels, with building plans passed, buildings completed and transfer duty paid also remaining near cyclical lows


And so the building trades may still have been disappointed by 2Q2012 realities, with activity levels rising but perhaps not close to hoped for as reflected in the recent FNB/BER building confidence survey, but this doesn’t make the trade prospect entirely hopeless.

Most of these indicators are off the recession floor by now. Last week the SARB added its voice by reporting on fixed investment trends in the 1Q2012.

The message was a positive one. After 19 consecutive quarters of activity decline, dating from early 2007, the building trades registered their second consecutive quarter of rising activity early this year, making 3Q2011 the undisputed low point of the most recent building cycle decline, according to Prof Johan Snyman, Director of Medium-term Forecasting Associates.

Since then things have been struggling higher.

There are parallels with what happened in the 1960s and 1970s, if with crucial differences.

In both instances real residential investment outlays expanded by two and half times during the preceding boom phase. It took 12 years doing so after the Sharpeville crisis low of 1960/61, and it did so again in only two-thirds the time following the 1998 Asian Contagion and prime 25% fiasco during 1999-2007.

The next parallel was the cyclical one-third investment pullback of 1974-1978, with the new recession low remaining twice the level above the 1960 low.

Recently, we have completed a similar cyclical decline during 2007-2011, both in duration (nearly five years) and extent (one-third peak-to-bottom), with the 2011 recession low also remaining nearly two-thirds above the last (1998) low.  

And now for the third parallel coming now into view?

Will the 80% eight-year 1977-1985 gold boom revival in residential building activity once past the Soweto interruption, be repeated again today, when counting through 2020, in both instances continuing the long advance in residential fixed investment?

The first omens aren’t particularly promising. The banks are still cautious in granting credit in the aftermath of the 2007 National Credit Act, the global banking crisis of 2007-2008 and the new Basel 111 bank capital requirements.

There still seems to be a household debt overhang harking back to the 2003-2007 boom days keeping demand extremely weak, and renting increasingly preferred.

Also, Continental Europe has taken over from the Anglo-Saxons in creating new insidious crisis conditions, something that seems far from played out, with a decade of challenges still stretching ahead, and this extending to US political and fiscal challenges, and also Chinese ones, at a time when the larger Middle East is going through another instalment of its very own existential challenges.

Forty years ago, a similar bunching of serial global crises awakened inflation fears enough to boost the gold price twenty-fold during the 1970s, in the process transforming South Africa’s balance of payments, boosting the Rand and inviting a substantial lowering of interest rates, fanning speculative fevers.

It drove the residential investment cycle to new high after having pulled back in the crisis-prone early 1970s.

This time around all the global crisis fevers imaginable have not transformed South Africa’s terms of trade (export prices over import prices) to a similar degree.

Even so, the country remains favoured with capital inflows for other reasons (more to do with the global policy response to the crisis conditions).

The Rand has been mostly favoured by these developments, inflation has been well anchored by global influences despite domestic indiscipline, and interest rates are cyclically at generous 30-year lows.

Yet all this has yet to ignite business or household confidence to any major degree or unleash speculative juices driving a typical asset boom, thereby also boosting residential property and building prospects.

Business remains subdued, households are cautious and bank credit providers are still ever so careful, given the uncertain global and domestic conditions.

The mid to late 1970s were no different, yet they got South Africans out of their foxholes. But is this time qualitatively different?

Well, yes. The gold price hasn’t added another zero (from recent levels), platinum is oversupplied and severely pressured and our export performance generally is nothing to write home about.

It is really all a foreign capital story?

Foreign capital is currently flowing primarily into our bonds (a defensive play). And although equities are touching new highs lately, where is the conviction in it all, with property languishing mostly in the doldrums?

Be that as it may. Besides all the many possible bad news configurations (and some people are as always incredibly imaginative to explain why the world will end shortly), there are three or four pieces of good news.

Both the European and US financial imbroglios will likely take at least a decade clearing up, but are likely in the meantime to keep their monetary authorities generous and the world well supplied with liquidity, on risk-on days favouring commodities and EM high yield plays, South Africa included.

China appears to be embarking on another expansionary cycle rather than being the third serial crisis of the decade, with its moderating growth still importantly supporting the global picture.

The Middle Eastern challenges have an upside in the manner some of its playout assists energy prices being pushed lower (as the Persian Gulf Kingdoms keep supply generous), thereby also supporting global revival.

And not least, as in the 1960s, 1970s and 2000s, South Africa is contemplating another massive infrastructure expansion, probably only fully taking hold from mid-decade, thereby potentially lifting growth and household means later this decade to drive property and the building trades anew.

This coming cyclical upturn should be different from the late 1970s and early 1980s, given the absence of a major global windfall effect (high gold price).

Yet this next extension of the Great Property and Building Advance of the Present Era (counting from 1990) may already have begun, if tentatively. It may still take two to three years to gain new sea legs but from mid-decade may develop more strength alongside a new infrastructure-inspired growth momentum.

For now all this remains mostly rich imagination. But the ingredients are there, and the historic parallels for all to see.

If anything, building and property are very cyclical and we are coming out of a particularly long and vicious interruption, though the long structural advance post 1990 may still be very much intact (just as it turned out to be in the early 1970s, the historic parallel).

It may not feel quite like that at the bottom of a trough in which many have gone out of business but that is to be expected, as it also did in the mid-1970s when Soweto hit with all its cropped up fury and the trade felt like being in recession forever.

Source: Cees Bruggemans, Chief Economist FNB

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