It is too early to assess the overall effect on the residential property market of the latest half percent cut in interest rates, but presumably it will provide a much needed boost to confidence. The housing market has been slowing in tandem with the economy following a mild acceleration in the first half of the year.
To put this into perspective, GDP growth has dropped from 3.2 percent in the final quarter of last year to 2.6 percent in the second quarter of this year and continues to slow.
Good news, however, is the fact that inflation continues to fall, indicating that interest rates may further decline, even sooner than expected, as the SA Revenue Bank attempts to bolster the economy. July’s Consumer Price Index surprised analysts by dropping to 4.9 percent, comfortably below the Reserve Bank’s upper range target of six percent.
The fall was due mainly to July’s petrol price reduction of 85 cents/litre plus a lower than usual increase in electricity charges.
But the latest fuel price increase in September is an unwelcome shock! The fuel cost to inflation may worsen as the international oil price continues to climb and the rand stays weak.
Electricity rose by only 9.6 percent in July, much less than anticipated.
First National Bank’s House Price Index, which is based on the bank’s mortgage book, showed a very slight decline in its year-on-year growth rate in July to 8.3 percent. This decline has been modest, but steady, since January. However, taking inflation into account (at 4.9 percent) we have a real improvement in house price growth of 3.4 percent.
In nominal terms, house prices in July this year are almost 15 percent higher than they were in February 2008. If one looks back to the inception of FNB’s index in July 2000, real house prices (adjusted for inflation) were actually 70 percent higher in June this year.
Basically, says FNB, house price growth on a year-on-year basis is still healthy. There has been a slowing of both sales and activity in the winter months, but this is to be expected. Hopefully, spring will put a lilt in the market’s step.
Affordability continues to dominate the residential property market.
Absa Bank’s Home Loans Division says the middle segment of the market continues to show some strain. The bank’s property analyst Jacques du Toit forecasts the market as showing "a relatively subdued price performance" towards the end of the year and into 2013.
The affordability vacuum is of concern.
In recent years household incomes have increased and residential property values have fallen. Interest rate cuts have made raising a mortgage bond an attractive proposition to most families, including first-time buyers. John Loos, FNB’s property strategist, says the market is becoming less and less affordable. He argues: "Average remuneration inflation as at the end of 2011 was down to six percent year-on-year, significantly slower than 2009/10 when it touched 15 percent at stages. With affordability slowing and strongly increasing assessment rates and utilities tariffs, as well as a significant degree of household financial pressure, the search for 'value for money' still appears to be on."
As a result, the so-called affordable housing segment has been outperforming the other housing sectors. And yet, data gathered by FNB’s valuers indicate that sectional title homes are underperforming full title homes.
Loos believes that is a result of an oversupply of sectional title units during the years of the building boom. The gap, however, is narrowing.
"The difference between the two is not a major one. Far more significant is the huge gap between existing houses and vacant land, suggesting still weak building activity." He postulates: "Could it be that sectional title oversupplies are being mopped up and that superior full title home price growth in recent years has begun to eliminate the 'value for money' advantage that the full title market had over sectional title?"
Looking at the broader picture, year-on-year price growth of 8.3 percent — if an accurate assessment of the residential market — is not to be sneezed at. With winter behind us and bank lending rates holding steady (at least), housing activity should pick up. We simply need the mortgage lenders to loosen the purse strings.
For the present, one cannot generalise. There are still pockets of steady sales achieving good prices.
The main metro markets are an example and the very top end of the market where there is little distressed selling.
Published courtesy of Intellectual Property Magazine. Source: Iafrica.com
