Doom and gloom weighs on residential housing market
South Africans view their primary residence as an important part of their long-term investment plan. Many of us rely on the accumulated value in our house to see us through our retirement years… As such we demand long-term inflation-plus returns from the capital invested in this asset. Local homeowners enjoyed the boom times between 2002 and 2007 – but since then the return from residential property has been dismal. And the trend looks certain to persist over the next couple of years.
The latest FNB House Price Index has certainly dashed any hopes of a strong improvement in residential house prices through 2011… FNB observes: “After a steady decline in the rate of growth since the mini-peak of 11% in May 2010, March year-on-year growth of 0.7% was only slightly higher than the revised 0.6% recorded in February.” The real value of houses declined by 3.1% in February (CPI came in at 3.7%) and will probably show a similar decline in March.
A function of the domestic economy
Loos builds his expectations for house price growth on economic growth, inflation and interest rates, all of which have been rising of late. Activity in the residential property sector is often dictated by the strength of the domestic economy. South Africa is coming off a 4.4% quarter-on-quarter GDP growth in the final quarter of 2010 and all the indicators point to a similar performance in Q1 2011. There are a number of statistics supporting this economic improvement including the Reserve Bank’s Leading Indicator, an impressive jump to 57.2 points in the Kagiso Purchasing Manager’s Index and the 25% improvement in vehicle sales March 2010 to this year. But this might not be enough to secure “record” economic growth for the year.
At the moment, GDP growth is under threat from rising inflation. Given oil at $115-plus per barrel and the ongoing inflation-plus increase in administered prices there is a strong possibility that inflation will break through the 6% upper limit of the Reserve Bank’s inflation target. “These [inflationary] forces are starting to feed into local inflation measures, with the producer price inflation rate for imports having risen to +4.8% year-on-year from a low of 0.7% as at December 2010, while the overall producer price inflation rate of 6.7% in February represents a rise from the previous month’s 5.5%,” says Loos. Producer price inflation is a good leading indicator of CPI.
As a result mortgage holders should brace for a 250 to 300 point interest rate rising cycle beginning in the second half of this year... We can expect the Reserve Bank to implement this hike by way of small 50 to 100 basis point increments over time. “Rising interest rates can be expected to slow domestic economic growth, especially given that much of the recent recovery was built on huge interest rate cuts, while higher oil prices by themselves, normally have a slowing impact on the global and thus domestic economy, even prior to rate hiking,” says Loos.
Rising interest rates not good for house prices
Higher inflation and interest rates will stall prospects of a recovery in the residential housing sector. Loos explains: “Our valuers are still experiencing weak demand relative to supply, and this even after huge interest rate reductions since late-2008!” Add to this the fact local consumers are still heavily indebted following the 2008/9 recession and the outlook for house prices is rather grim. “If the residential market cannot achieve respectable house price growth after such a huge interest rate stimulus, a period of house price decline would be the likely outcome of [any] interest rate hiking later this year,” says Loos.
This rather “down and out” assessment of residential real estate ties in perfectly with the multi-year view of house price cycles. A seven-year boom is usually followed by a seven years bust! So if we view 2006 as the last “boom” year, we will wait until end-2014 for a real recover in prices. And that will probably coincide with the next interest rate cutting cycle...
Editor’s thoughts: Although few will deny the benefit of entering retirement with a fully paid up home, there are limitations to this asset type. Houses are extremely illiquid and you cannot easily convert the brick and mortar asset into cash… And, as many retirees have discovered, downscaling from a large house to smaller property doesn’t leave much spare change… How do you treat the primary residence when completing a financial needs analysis? Please add your comment below, or send it to gareth@fanews.co.za
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