Falling house prices deploy a parachute
If you’ve ever jumped from an aeroplane you’ll have a healthy appreciation of the word, “plummet”. You’ll also know that when you pull the parachute rip cord you don’t stop falling. You merely fall at a slower rate – drifting slowly to your chosen landing zone. The latest house price index from mortgage originator ooba – oobarometer May 2009 – reflects a slowdown in the rate of house price decline. In keeping with our opening analogy, house prices have deployed their parachute, and are at last headed for a soft landing. But the bottom isn’t in sight yet.
Saul Geffen, chief executive of ooba, says “the oobarometer continues to reflect declines in year-on-year house prices, but at a slower rate.” He says there’s been a 0.5% decline in annual house prices year-to-year May 2009. This puts the average house at R773 400 and the average ‘first time buyer’ home at R546 202. Although the decline in house prices is marginal, there’s been a big drop in the average bond size recorded against these properties, down 9.9% year-on-year to May!
Statistics contradict opinion
Geffen says “the recent series of interest rate cuts has provided a turning point in the property market and that the market [will] begin to stabilise by the end of the year.” But his observation conflicts slightly with the trends reflected by the oobarometer price index, most notably around deposit requirements. The average deposit as a percentage of purchase price is currently 22.6%, up from the 14.4% reported in May 2008. “There has been a significant increase in deposits now required to purchase a home,” says Geffen.
Let’s take a moment to reflect on this deposit requirement. A prospective buyer now has to find R169 500 (excluding bond, conveyance and transfer costs) to purchase a middle-of-the-road R750 000 house. South Africa’s treacherous national savings rate probably means that most individuals have to start the savings process from scratch. It would take a buyer almost three years to ‘save’ enough to cover the deposit, assuming they had R5 000 per month spare. How can Geffen predict a turnaround in average house prices under these conditions?
He admits that “the lack of funds for deposits, despite good credit scores, is a big contributor to the current sluggishness in the property market.” The National Credit Act and tight bank credit extension could thus keep the lid on prices for quite some time. The oobarometer also reveals that the average decline rate on mortgage applications has reached 49.5%. In other words: one in two new mortgage applications is declined by the first bank to process it. Only 26% of these decline decisions are reversed at a second bank. We’ve even heard of internal home loan processing units that decline nine out of every 10 applications!
Struggling – who us?
Professionals in the property industry could be facing another lean year or two. This fact was highlighted in a recent Business Report article. Roy Cokayne wrote that “the number of registered estate agents in South Africa has fallen more than 50 percent to 38 000” since the industry peak of some 84 000 agents in 2007. The Institute of Estate Agents’ national president, Willie Marais, added that far fewer than 38 000 of these agents could be considered ‘active.’ He told Business Report that this decline was probably permanent due to the volume of property transactions processed under the new legislation.
The tough economic climate is impacting the profitability of the estate agency business model. “The number of estate agencies closing down is bigger than you think,” said Marais. But despite this bleak outlook there are plenty of professional agents making good money in today’s slower market. We’ve had first hand experience with this ‘struggling’ profession of late. Two weeks after chatting to an agent at the local branch of one of South Africa’s top national real estate agencies, we’re still waiting for the promised follow-up call. Makes you think doesn’t it!
Editor’s thoughts:
House prices hardly matter if there aren’t any qualified buyers. Under current conditions there’s no point in dropping asking prices – because a buyer that cannot raise R750 000 is probably going to fall short of the R700 000 mark too! Have you had any experiences with mortgage application processes in recent months? Add your comments below, or send them to [email protected]
