Residential Property Outlook

House prices are beginning to fall in real terms as interest rates and a growing affordability problem continue to bite. Many analysts are beginning to doubt that infl ation targeting is a sound policy for SA’s emerging economy. The big fear is that Reserve Bank governor Tito Mboweni will stick to his guns and raise rates again. Volumes in the residential property market have fallen by as much as 30% since the beginning of the year as house price growth has stagnated. It is now diffi cult to agree which of a number of adverse conditions has had the greatest negative impact, but rising interest rates is probably at the top of the ladder. April’s 50 points increase by the Reserve Bank was considered by many analysts to be the fi nal straw in breaking the housing market’s back. In nominal terms house prices still showed 8,7% year-on-year growth in March, according to Absa’s House Price Index. But with infl ation at 9,4% this relates to -0,7% in real terms. This is the fi rst time since June 1999 that real year-on-year house price growth was negative. The retail banks’ prime rate is now 15%, and it’s likely to go higher. Infl ation is running wild, fuelled mainly by food and oil prices and their knock-on effects – and the Reserve Bank governor, Tito Mboweni, is determined to bring it down towards his infl ation target range of 3%-6%. Now, economists are suggesting that the Bank will raise interest rates again in June and in August. In effect, the Bank has no other weapons in its monetary arsenal. Unfortunately, higher rates tend to lure short-term foreign capital as the rand strengthens, which in turn adds to the infl ationary spiral. There are other factors affecting the housing market. The National Credit Act, introduced last year, has restricted the ability of commercial banks to freely grant mortgage bonds, making it more diffi cult for buyers to make a purchase. The huge increase in monthly bond repayments has increased the number of defaulters, creating excessive stock being put on the market. Macquarie First South economist Gina Schoeman has estimated that the disposable income of a typical middle income household has fallen 39,3% between 2005 and 2006. And now, in 2008? In addition, there are external factors pulling down the market. The uncertain political situation here is one. The turmoil in Zimbabwe has created growing unease among, in particular, the affl uent sector. Estate agents report that around 13% of houses currently for sale are due to emigration decisions. According to Absa, house price growth is expected to slow down even further this year. Nominal price growth of around 7% (-2% in real terms) is projected for the full year. However, this could worsen considerably if the Reserve Bank delivers a double whammy in June and August. Pam Golding Properties’ Gauteng director Ronald Ennik believes price pressures will be downward for the next two or three years. Standard Bank reports that certain areas are experiencing house price defl ation “albeit from a high base”. Houses are increasingly being sold at below the initial asking price and are staying on the market for longer and there is increasing anecdotal evidence or a rise in distress selling, says the bank. Even what has been the superior performance of lower-priced homes looks like coming to an end. FNB’s property strategist John Loos argues that lower income families face high food price infl ation as well as the hardship effects of interest rate hikes. “Food price infl ation affects lower income households worse because it consumes a higher proportion of their total income.” General feeling in the residential property market is holiday properties are in for a diffi cult period, while developments are already slowing and new ventures are being put on ice. The situation with Eskom – not just supply restraints but whether it will be allowed to increase tariffs by the 60% it has asked for – is further adversely affecting the market. However, all is not gloom. Standard’s May residential property gauge says the bank is confi dent that the residential market will experience a relatively mild cyclical downturn rather than a fullblown recession, as is the case in the US housing market, brought about by the sub-prime crisis. In fact, the bank sees the lowest ebb in the South African housing market as being in May, June and possibly July. The bank does not foresee a US-type housing recession here in South Africa and points out that SA banks have been much more conservative in their lending criteria than those in the US and elsewhere. Also, it points out, “the South African housing market is not faced with the same situation of a severe excess supply, as in the US, which will require substantial reduction in house prices for the market to clear.” For homeowners and investors alike, the thing to remember is that the property industry is cyclical. As PGP chief executive Dr Andrew Golding says: “While the market is clearly in for a challenging period, there is no doubt that in the even in the medium term – and certainly in the long term – property as an asset class will continue to provide sound investment returns.”