Interest rates could scupper house price revival
The say you shouldn’t kick a man when he’s down – if you’re fighting fair! But in a world where inflation is determined by myriad extraneous factors the South African Reserve Bank doesn’t have time for fair play. If they stand back and offer a helping hand to the inflation monster things quickly get out of control. Economists know this – as do you and I. We’re no longer waiting to see whether or not the central bank fires up its interest rate cannon, but rather the size of the shot it loads when it does! Will we see 50 basis points before the end of 2011? Or will governor Gill Marcus give inflation a bit more time to grow roots across the domestic economy?
Whatever they decide an interest rate hike could prove fatal for our doddering real estate sector. Over the past three or four years stakeholders in the industry – whether they be property developers, conveyance attorneys or real estate agents – have watched the industry nosedive. They’ve struggled to make ends meet not because of declining house prices (the statistics largely reported in the media), but because of plummeting transaction volumes. If new houses aren’t being built and existing houses aren’t being sold, then the price of the transaction hardly matters. We’ve heard of ‘investors’ who purchased second, third, or even fourth properties during the recent residential real estate boom who cannot sell at any price today, for example.
This home loan originator remains cautiously optimistic
Have things improved through the first half of 2011? To find out we turn to the latest residential property price assessment provided by home loan originator ooba. The group reports that residential house prices grew slightly in June compared to a year ago, following two months of year-on-year decline. Should we hit the nearest tavern and crack open a case of bubbly? Let’s not be too hasty!
The oobarometer price index reveals that the average house price rose just 1% year-on-year to June 2011, from R837 599 to R845 725. This trend played out in the so-called ‘first time buyer’ space too. First time buyers paid, on average, 1.1% more for their homes than a year ago, stumping up R618 084 in June 2011 versus R611 611. It takes a certain creativity to snatch good news from the latest report. Saul Geffen, CEO of ooba, says the 25.1% year-on-year decline in the average deposit as a percentage of purchase price is worth celebrating… But upon closer inspection a home buyer still requires an average deposit of 12.8%! We challenge you to find an additional R128 800 to fund your next R1 million home purchase!
Industry stakeholders can take some solace from the latest home loan approval statistics. In June 2011 ooba’s bond application approval rate improved to 51.3% versus 41.7% a year ago. “We have recorded consistent month-on-month increases in bond application approvals since the beginning of 2011,” says Geffen. But he was soon lamenting the value versus volume debate I mentioned in the opening paragraphs.
Geffen observes: “We have experienced a growth of 51.9% in the value of approved home loans in the last quarter in comparison to same period in 2010… But the volume of loans approved in June is still only one quarter of the approved loans recorded at the peak of the market in May 2007.” At this point we should remind our readers that ooba’s statistics are compiled from the organisations mortgage origination experience and that some of this growth reflects the company’s increased market share plus organic growth from improved property market and lending conditions.
What’s underpinning this moderate improvement?
By now you’re probably glancing nervously at the title of today’s newsletter. Geffen reckons that recent improvements in property market conditions are a direct result of the current low interest rate environment, following a reduction in interest rates of 650 basis points since December 2008! “The record low interest rates, coupled with subdued property price inflation, increased bank approval rates and lower deposit requirements has resulted in an influx of applications by potential homeowners,” he says. But low interest rates, rather than curing the residential real estate patient, have served as life support. The real test of any house price recovery will occur during the next rising interest rate cycle – starting soon at a mortgage lender near you!
We will be watching ooba’s house price statistics in the months following the next interest rate hike to see how much of an impact higher interest rates have on the housing market. A significant change could see major lenders revert to more stringent lending criteria again. If the banks decide to tighten their belts ooba’s overall approval rate could reverse from its June 2011 levels of 63.9% toward the all-time low of 55.6% recorded in May 2010. A quick look at local economic news flows suggests a return to the group’s May 2007 peak approval rate of 81.26% is unlikely.
Editor’s thoughts: The housing market will only fire on all cylinders when the economy does. But as we enter the second half of 2011 it appears as if South Africa’s post-recession economic growth has lost momentum. We’re struggling with strikes and other labour issues (internally) and the threat of sovereign debt defaults (offshore). Given current growth concerns – and the rather dismal outlook for residential housing – do you think the Reserve Bank will hold off on interest rate hikes till 2012? Please add your comment below, or send it to [email protected]
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