Homeowners pay a double toll for high interest rates
It’s official. House prices in South Africa have been on the back foot since halfway through 2006. That’s according to the latest Residential Property Gauge issued by Standard Bank Research Economics. The bank’s research confirms the heavy price local consumers have paid on the back of the Reserve Bank’s 500 basis point hike in lending rates between June 2006 and October 2008.
The median house price fell 1.6% over the whole of last year – a turnaround from the 8.3% increase calculated for 2007. Standard Bank says the median residential property financed by the bank fell to R592 000 in December 2008. But the return from houses isn’t too bad when we compare it to the stock market where shares lost 26% over the year. Besides, these statistics shouldn’t be viewed in isolation. Declines in the numbers of mortgages issued as well as shifts in the initial amounts applied for can seriously skew the statistical outcome. In our view the latest fall in average house prices is due to extraordinary demand-side influences.
The snowball effect
Have you ever rolled a snowball down a slope of fresh snow? The further the ball rolls – the more snow it gathers – until it becomes a giant snowball crushing everything in its path. It seems the local housing market has been smashed by such a force.
There were a number of factors that helped this snowball reach its abnormal size. We’ve already mentioned the disastrous effect of increasing interest rates. Rising debt and debt repayments forced the average household debt-to-equity ratio to around 76% while the debt-to-repayment ratio crawled dangerously close to the 12% level. But the real damage has been done by the National Credit Act. The current decline in mortgage loan approvals is both an indictment of the gung-ho approach of mortgage lenders prior to the Act – and a reflection of how house prices growth outstripped affordability before its implementation. Essentially, reckless lending practices pushed house prices higher than they should have gone… If banks had properly assessed affordability in the boom years (from 2002 to 2007) house prices would have grown at a much slower rate...
As evidence of this, Standard Banks says “the number of mortgage loan applications declined significantly in November and December compared to October” last year. There are less people applying for loans because they know they don’t qualify. On top of this the new banking regulations which assess applications on ‘loan-to-value’ criteria severely “restrict the ability of households to access finance.” Banks now expect prospective buyers to have deposits of between 10% and 20% of the home value before completing the purchase. And people aren’t offering on properties, because they don’t have the R150 000 free cash to deposit on a house going for R750 000!
And now for the bad news
What else can possible go wrong? The major hang-up as we enter 2009 relates to a rather depressing macroeconomic outlook. GDP growth came to a virtual stand still in the third quarter of 2008 as South Africa caught cold from its major trading partners. We now know that the US, Europe and Japan are in full-blown recession and that the World Bank has seriously downgrades its forecasts for global economic growth in 2009. The result is the prospect of job losses in an economy that can sorely afford them. Last year, trade union Solidarity warned the economy could shed 300 000 jobs. Right now it looks like their estimate is on the ‘soft’ side.
Even those who keep their jobs have problems. Standard Bank says the average after-tax disposable income in South African households increased by a mere 0.20% in Q3 2008 – not close to enough to compensate for the 12% plus inflation. The stress the average South African household is under is clearly demonstrated in the motor retail figures. Sales of new passenger cars were down 20% for the full year and motor retailers are closing shop at an alarming rate.
Standard Bank sums up: “Clearly, the housing market cannot prosper in a weak economy, which is still reflecting a rising number of insolvencies and liquidations.” We agree – and add that prospective buyers have more hurdles to overcome than the last time property prices fell. That’s why we expect prices to remain flat for quite some time.
Editor’s thoughts:
We spent part of last weekend driving through our neighbourhood to find out what houses were on offer. The feeling we get is that sellers have simply given up. Houses remain on the market for months on end as they hold out for their mid-2007 asking price. Have you tried to sell a property recently? If so, were you able to get your asking price? Add your comments below, or send them to [email protected]
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