First National Bank (FNB) said on Wednesday that building activity continued to contract during 2010 and that it expected confidence in the sector to remain low for some time.

Nevertheless, the FNB Building Confidence Index did rebound slightly during the third quarter of the year to 29, after falling from 30 to 24 during the second quarter of 2010. At 29, the index is still very low compared to the levels of 80 plus reached during the period 2005 to 2007.

Even so, the present level is still above 11, the lowest point reached during the previous downturn. This suggested that the index had probably not reached its lowest point and could decline further during upcoming quarters, said FNB chief economist Cees Bruggemans.

"At first glance the third quarter rise in the FNB Building Confidence Index appears to be a positive development. However, further analysis paints a bleaker picture".

He pointed out that confidence merely returned to first quarter levels, which was in itself low. Secondly, respondents reported that their previous expectation of a turnaround did not materialise by far and that their volume of work continued to contract at a very fast pace during the third quarter.

Given such unfavourable developments, the rebound in confidence is surprising, but the fact that respondents were optimistic that the situation would improve during fourth quarter might have lifted their confidence, said Bruggemans.

During the third quarter, residential building activity contracted at an even higher rate compared to the second quarter. "In contrast to respondents, we do not expect this dire situation to reverse as quickly. This time around the fall in the interest rate will in itself not kick start residential building activity as usual."

Bruggemens said that demand for high priced houses of about R1-million plus in today's value, which was the lifeblood of the industry before the onset of the recession in 2008, would most likely remain weak owing to the fall in their attractiveness as investments and the number of people who could afford them.

"Residential building activity will only recover noticeably when the industry is able to supply mid-priced houses, between R300 000 and R500 000, and government plans to increase spending on social housing were executed.

Further, nonresidential building activity continued to contract at a very high, albeit somewhat lower rate compared to second quarter figures.

Bruggemans said that similar to the residential sector, nonresidential contractors expected activity to recover during fourth quarter. "Once more this expectation seems overly optimistic. The nonresidential sector is only now after the completion of the last large projects, mainly by institutional investors, entering a full-blown recession."

FNB Property Strategist John Loos said that demand needed to first catch up with supply and vacancies and rent needed to rise before nonresidential building activity would bounce back noticeable.