House price recovery or another false dawn
If the latest industry comment is to be believed then there’s precious little consensus from key stakeholders in the domestic property market regards the outlook for residential property prices. We already know that real estate agents tend to be more bullish on property prices than banks, for example. But when Deeds Office data conflicts with bank property indices you have to start wondering what’s on the go?
Lightstone.co.za introduced their August 2009 house price index with an overdose of positive spin: “Not only are we past the worst of the property market slump, but over the last few months property prices are actually on the rise again, although modestly so,” they said. According to their latest statistics we’ve experienced positive house price inflation for four consecutive months. Lightstone generates repeat sales statistics from a database of transactions compiled from the Deeds Office, Surveyor General and other sources. Given that Deeds Office data lags house transactions we’re surprised their index is already signalling a turning point. In any event some of the banks don’t concur.
Standard bank sends conflicting views
Standard Bank is a case in point. The group’s property book confirms an average monthly decline of 3.9% in the median house price in the first eight months of this year. The bank has now reported monthly declines in 15 consecutive months with “no sign yet that the bottom has been reached.” The 5.2% year-on-year contraction in August 2009 is the deepest experienced since the downward house price cycle began. A year ago (August 2008) the year-on-year contraction was a mere 1.1%. Once we factor in the bank’s inflation estimate, real house prices contracted by 11.5% in the latest period! Standard Bank concludes that “important drivers of overall growth in the economy, such as the level of household income and debt, as well as the medium-term economic and financial outlook, are such that a quick turnaround in the housing market is unlikely.”
Imagine our surprise when an upbeat article appeared on Fin24.co.za a couple of minutes after Standard Bank’s August 2009 housing market update flashed across our computer screen. The article – based on a Standard Bank media presentation – declares that the bank will relax its lending criteria on houses changing hands for less then R1.5m. They will no longer require a deposit from prospective homeowners in this segment of the market. The group also announced 104% loan-to-value mortgages on houses less than R1m. Of course the provisions of the National Credit Act will remain in force. The bank’s announcement coincided with a rather damning assessment of its non-performing home loan book. Non-performing loans account for 9% (or R22bn) of the group’s entire (R250bn) mortgage book! This translates to some 34 500 bond holders in arrears for three months or more.
Drowning in debt
Why would Standard Bank soften lending criteria when both its book and the consumer are in such bad shape? Consumers remain under tremendous debt pressure. Earlier this week the National Credit Regulator (NCR) warned that as many as 150 000 South Africans would be under debt review by Christmas. Andre Snyman, chief executive of Consumer Assist told BuaNews there were already 100000 consumers with R20bn in combined debt under debt counselling. The NCR estimates 1.3 million citizens had fallen into arrears in the two years since June 2007. Apart from mortgage loans those seeking debt counselling often have dozens of outstanding accounts.
Standard Bank mentions numerous stumbling blocks to a quick recovery in the residential property market. We’ve talked about many of them in previous FAnews Online newsletters. They include global recession, rising unemployment, residual inflationary pressures, low consumer confidence and ironically the banking industry’s loan-to-value restrictions. “The best that we can hope for is for price declines to stabilise towards the end of the year as the recent interest rate cuts work their way through the economy and overall consumer and business sentiment improves,” said Standard Bank. From that point residential property will recover in line with South Africa’s economy. Even finance minister Pravin Gordhan acknowledges the recovery will be a slow and drawn out affair.
Editor’s thoughts: The fact that leading property indices are sending conflicting signals suggests we’re in the choppy period where house prices are either turning or about to. But the real test for the housing market will be whether transaction volumes pick up. Do you think a return to 100% bonds will be enough to trigger a full blown house price recovery? Add your comments below, or send them to [email protected]
