House price recovery still some way off
Try as we may we cannot shake the ongoing debt crisis playing out in the US and Euro-zone. South Africa Inc has followed the international trend by posting poorer than expected GDP growth for Q3 2011. Statistics SA says our GDP came in at a disappointing 1.4% quarter on quarter (q/q) compared with 1.3% q/q in the second quarter. We were also some way short of the 1.8% q/q consensus forecast. What does this mean? “For 2011, GDP growth is expected at 3.1% (this has been revised lower during the year), while for 2012, SA GDP growth is now forecast at 2.7%, with risk to the downside,” observes Kevin Lings, economist at StanLib. “The lower growth projection for 2012 anticipates a negative impact from the weakened global economy (global GDP growth forecasts have been revised down sharply in the past couple of months, especially for the Euro-area) as well as an erosion of domestic consumer activity due to rising inflation.”
A closer assessment confirms growth in the retail and financial sectors (particularly in the bond and equity markets) while critical market segments such as agriculture, mining and manufacturing show substantial declines. The latter areas are critical if South Africa hopes to tackle its unemployment crisis! Economists say we need 5%-plus GDP growth to create jobs and for fixed investment spending to rise from today’s 18.9% back to its Q4 2008 peak of 24.6%. After nine quarters of post-recession economic growth the domestic economy is still spluttering along. “The most recent economic data suggests that the economy has lost momentum,” says Lings. “Without a meaningful increase in employment, especially formal sector employment, the South African economy will continue to lose momentum, aggravating the already unbalanced and worrying social conditions.”
Housing sector awaits GDP turnaround
Residential house prices are likely to remain under pressure until the overall economic growth prospects improve. The latest FNB House Price Index (for November 2011) confirms a three-month slowing growth trend and reflects a paltry 3.2% improvement in prices (this November versus last). Once we factor in inflation – CPI was measured at 6% in October 2011 – we’re faced with a 1.9% contraction in real house prices. “The average house price in real terms is 16.6% lower than its long term peak reached in February 2008, a significant correction to date,” says John Loos, household and property sector strategist at FNB Home Loans. Property remains a good bet over the longer term, with the index measuring 63.8% real growth going back to its July 2000 level...
House prices reflect the tug of war between buyers and sellers. The growth numbers presented by FNB suggest the sellers are winning this struggle for now. We can confirm this by looking at the FNB Valuers’ Market Strength Index – based on valuers’ opinions of supply and demand – which points to ongoing weakness in demand relative to supply. “The Market Strength Index has been consistently below the crucial 50 level since September 2008,” says Lings. “As at November 2011, it recorded a level of 44.96, a slight improvement after a weakening trend since late-2010.” An index level of 50 points reflects a perfect balance between supply and demand... This index will have to strengthen to 50 points or better for house prices to resume an upward trend.
Expect another flat year
Loos says the residential property market is likely to remain flat for the foreseeable future. Apart from the poor performance of the bank’s housing indices our economic growth (outlined in the opening paragraphs) will prevent short-term price improvements. “Looking at the Reserve Bank Leading Indicator, which has been in month-on-month decline for the past three months, we can expect the next few quarters’ growth rates could be as slow or even slower,” he says. He warns that nominal growth through 2012 will probably be worse than the 3% forecast for the current year. With consumer price inflation expected to fix in the 4% to 6% range next year, home owners can expect a further house price decline in real terms through 2012!
Will further interest rate cuts revitalise the residential property market? “The reality is that bringing the property market back to health is far more complex than merely cutting interest rates,” notes Loos. He believes the current interest rate – already at a multi-year low – strike a nice balance by providing relief to highly indebted households without encouraging additional household borrowing. Instead of interest rate cuts you should be wishing for an improvement in residential rental yields (currently stuck in the 5% to 6% range) and economic policy changes to improve public sector service deliver and labour market performance.
Editor’s thoughts: Residential property prices move in long-term cycles of up to 20-years. Loos estimates the last low in the cycle was in 1998 – which suggests we could wait until 2018 for before the current cycle low point is reached. And we’re not even factoring in political risk. Does the ruling party’s ongoing nationalisation debate hurt the residential property market? Please add your comment below, or send it to [email protected]
