House prices going nowhere slowly through 2012
There are dozens of property market commentators sharing views on the outlook for residential property prices through 2012. In recent weeks we’ve read comment from Standard Bank property economist Sibusiso Gumbi, Rode & Associates’ Erwin Rode and head of
To expand on prospects for residential property we unpacked the 2011 FNB House Price Index Wrap and 2012 Outlook distributed by FNB Household and Property Sector Strategist, John Loos. The group wastes little time in setting the scene. “2011 was a year of slow house price growth… And 2012 promises more of the same,” they say. This news is unlikely to concern the average homeowner who purchases a primary residence with the intention of living there for two or three decades. But it affects individuals who need to sell their homes quickly due to relocation, emigration or for other reasons.
The numbers are in – and 2011 was horrible
Published mid-January 2012 the FNB House Price Index paints a dismal picture for house prices last year. 2011 was dominated by a slowdown in growth in residential demand and continued downward pressure on house prices. As a result, the 2011 average house price of R802, 988 is only 3.1% higher than the average 2010 price of R779, 041! And if we adjust this number for consumer price inflation (CPI) we are likely to post a decline of 1.9% in real terms (the final inflation number for 2011 has not been released yet). This follows from a 2.7% real decline in 2009 and a “soft” 1.7% real increase in 2010. Why does house price growth remain sluggish?
Property analysts offer a number of reasons… Poorer than expected economic growth levels, the introduction of tighter lending rules at the country’s mortgage lenders, the impact of the National Credit Act and lack of further interest rate cuts through 2011 all get a mention. Prospective homebuyers are definitely struggling to obtain finance. “There’s been a structural change in the mortgage lending market,” comments Salter, again in Finweek. “The proportion of people getting 100% loans is never going to get back to the levels seen before the financial crisis.” And there’s worse news. Economists say the next interest rate move will take the prime lending rate 50 basis points higher, further impacting the affordability of mortgage repayments.
The “doom and gloom” sentiment is underpinned by anecdotal evidence form FNB’s Valuers Market Strength Index which confirms a widening gap between supply and demand. “The Valuers’ Market Strength Index provides a plausible explanation for the ongoing weakness in nominal price growth in 2011,” says Loos. “It points to weakness in demand relative to supply.” The bottom line is that buyers and sellers disagree on the value of the underlying asset. Sellers want more for their properties than what buyers are prepared to pay – with the result the supply side of the equation is spiralling out of control. There are simply more properties on offer – and at higher prices – than buyers can accommodate.
Each year same as the last
“We enter 2012 with a residential market showing strong supply relative to demand with forecasts of a mediocre economic performance at best,” notes Loos. The International Monetary Fund (IMF) has already downgraded its 2012 global growth forecasts. And South Africa is in similar territory. We recently attended an Absa Capital presentation where the group's economists downgraded their South Africa GDP growth forecast for FY 2012 from 3.6% to just BREAK 2.8%! The housing sector, as expected, tracks the growth in the domestic economy.
Sub-3% economic growth is unlikely to light fires under local house prices… Residential property investors will have to turn to the Reserve Bank for relief. Loos – who differs slightly from the economic mainstream – opines: “In 2012, a real possibility exists for further mild interest rate reductions.” His case is built on the possibility of CPI “peaking” early in 2012, thereby affording the central bank an opportunity to proceed with another small cut. Chris Hart, economists at Investment Solutions, disagrees. Hart argued on television recently that the current low interest rate (at 5.5% the repo rate is already negative in real terms) is driving dis-saving in the economy and is untenable.
Against this backdrop Loos expects average house price growth to slow further through 2012. FNB has pencilled in a 2% nominal growth this year (versus 3% last) which would yield a negative real return from residential property of 3%!
Editor’s thoughts: The soft outlook for residential property has rekindled the rent versus buy debate… Many property analysts suggest your clients would be better off renting over buying, provided they invest the difference! Are South African savers disciplined enough to go the rent versus buy route when it comes to primary residences? Add your comment below, or send it to gareth@fanews.co.za
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