The index revealed that year-on-year, building cost inflation measured 5.8% for the third quarter, down from a revised 5.1% in the previous quarter.
The inflation rate in the third quarter remains tame by comparison to the 38.8% recorded at the last peak in the third quarter of 2006.
"On a monthly basis we have seen a rise in the year-on-year inflation rate of the producer price index (PPI) for building materials from 7.9% in January to 17.7% in September," said property strategist at FNB John Loos.
Looking forward, Loos said that prospects for a decline in input cost inflation might have improved given the significant fall in global commodity prices, although this fall in dollar terms may have been partly offset by a rand depreciation.
He noted that it is expected that input cost inflation in some form will continue.
At the same time, house price inflation according to the FNB House Price Index is nearing zero and it is believed that the significant difference between input cost increases and house price inflation is contributing to keeping the average price of new houses above that of existing houses.
For the four quarters up to and including the second quarter of 2008, square metres of residential space completed declined year-on- year by -7.3%, while square metreage of building plans passed declined by a massive -22.3% according to Stats SA building stats.
"The pressure, therefore, really appears on for building contractors, who are caught in the middle of very weak demand for new residential properties on the one hand, but limited ability to adjust their prices downward due to substantial input cost inflation, and the net result is a steady slowdown in new residential property coming onto the market," said Loos.
On the commercial property side, building cost inflation is still somewhat higher than the residential market, which is believed to be indicative of a commercial property market that is still in better shape than the residential market.
From 12.9% year-on-year in the second quarter, the overall Commercial Building Cost Index's inflation rate declined to 10.3% in the third quarter.
Loos noted that while industrial property has fared well until recently, and still has relatively low vacancy rates, it has to deal with a probable manufacturing sector recession this year, brought about by the combination of a global economic slowdown and a local durable consumer goods demand slump.
Hence, possibly, limited pricing power of building contactors as this property segment comes under some short-term pressure.
Loos noted that retail property is believed to be ahead in the commercial cycle, having already entered a multi-year returns slowdown in 2006.
Shopping centre completions have taken place at a robust rate in recent years while consumer demand has been slowing for some time.
The combination is sure to put building contractor pricing power under pressure, and the -6.5% building cost deflation rate may well be reflective of this. I-Net Bridge
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