House prices suffer another blow
House prices suffer another blow
Some FAnews Online readers have taken exception to this year’s gloomy forecast for
The Standard Bank House Index for April 2008 shows that the average house price has fallen 8.6% year-on-year to R530 000. The corresponding ‘price’ in March of this year was R550 000.
Many reasons for downward spiral
In today’s newsletter we offer comment on some of the factors that have combined to drive house prices down. The first and most obvious is the decline in affordability. Three waves of interest rate hikes have eaten into disposable income and pushed the average home a few steps higher on the affordability ladder. And just as the second wave of interest rate hikes took effect the consumer was hit by the implementation of the National Credit Act. Banks and other credit lenders are now legally obliged to apply stricter criteria before awarding loans.
Talk to anyone in the real estate game. In the past you could celebrate selling your house when the Offer to Purchase was signed and delivered to the attorney’s offices. Today it’s not unusual for residential property transactions to fall through two or more times. Prospective buyers believe they will qualify for finance and make their offer based on this assumption… But tighter lending conditions mean many loan applications are turned down. This fact is perfectly illustrated in the ‘private sector borrowing’ graph included with the report. Mortgage advances have been in steep decline since the beginning of 2007!
It seems the last straw for residential property has been the dramatic start to 2008. Eskom’s load shedding antics have put the fear of God into many South Africans who are once again fleeing the country in droves. International removals companies haven’t seen this kind of action since the mid-1990s – with applications for emigration to
Can we believe what the big banks say?
Standard Bank takes some care to qualify the decline in the median price of houses as shown in their data. They claim that “distortive base effects may continue to impact the point estimates of the monthly median house price in May, June and possibly July, suggesting the possibility of further deep negative year-on-year growth rates in those months.” This is rather a bizarre stance from one of the country’s major mortgage lenders… Are they really suggesting that the visible decline in house prices is an anomaly? Should we view these numbers in relation to the high base price established last year due to hastened loan processing in the run-up to the National Credit Act? This is the kind of talk we expect from estate agents.
For all the reasons mentioned above we think the residential property market will remain in the doldrums far beyond June this year. After all, even the big banks acknowledge that inflation is way out of control. Most analysts expect we’ll see another interest rate in June – and possibly another in August. And there’s no reason why property should turn in a rising interest rate cycle… Conditions in the real estate market will get tougher before they improve. And that’s before we consider the impact of political instability caused by the pending elections in 2009, the ongoing
Standard Bank doesn’t try to deny this downturn; but they certainly sugar-coat it. They say that although we’re not on the same path as the
Editor’s thoughts: Regardless the asset class you invest in, assets are subject to the ebb and flow of the economic cycle. This concept is easy to grasp when dealing with listed companies. Is there really an argument that house prices can escape the ravages of the current difficult economic environment? Add your comments below, or send them to [email protected]
