House prices suffer despite deep interest rate cuts
Will interest rate cuts halt falling house prices? If you answer “yes” to this question then you’ve probably missed the subtle shift in the residential real estate value debate. House prices are no longer a function of affordability, but rather of liquidity. It doesn’t matter how much you can afford to repay on a monthly basis when your bank won’t lend you 100% of the purchase price. South Africa’s residential property market has been dealt a double blow. The first in the form of the National Credit Act, and the second, the tightening of credit liquidity as the international financial system went to the brink.
Separate surveys confirm house price drop
The latest house price statistics reveal how serious the impact is. FNB’s house price index confirms an 11.3% fall in average prices year-on-year (y/y) in May 2009. It’s the worst drop on record and comes in the wake of six consecutive months of y/y price declines. Another independent data release from Lightsone confirms the trend. Their house price index shows a decline of 4.5% in April 2009. FNB home loans property strategist John Loos said the “rate cuts are to a great extent offset by an economic recession that is containing growth in household buying power.” These economic pressures contribute to an oversupply of residential housing units as struggling consumers are forced to sell their homes. Excess supply plus artificially constrained demand is going to keep house prices in the gutter for some months to come.
Before you get too miserable about the gloomy outlook, spare a though for property owners in the rest of the world. Statistics from UK property group Knight Frank show that residential property prices are declining in 31 of 46 countries in its global index. There aren’t too many surprises on the list. Property in Dubai is down 32% in Q1 2009 with Singapore (-23.8%), the US (-16%) and the UK (-16.5%) not far behind. South Africa has slipped to 16th place on the Knight Frank ratings.
Housing market ignores interest rate cuts
Another way to unpack the country’s housing market is to look at mortgages advanced. We turned to Absa Economic Research’s Mortgage Advances, published 28 May 2009 for answers. The South African Reserve bank measures mortgage advances growth by comparing the month-end total net outstanding mortgage loans (both private and commercial) across the country’s monetary institutions. According to them the y/y growth in mortgage advances fell to 10.5% in April 2009, the lowest growth rate since February 2003. Mortgage advances growth is even slower if we isolate household mortgages. “Growth in the value of mortgage advances, largely related to residential property, dropped to 7.7% y/y in April 2009,” says Absa. Loans secured against residential property still account for R708bn, or 72.1% of total mortgage debt.
How doe we explain this trend? A picture is worth a thousand words. If we superimpose a graph of mortgage advances growth with the interest rate we can see to what extent the National Credit Act and tighter lending conditions affect the industry. During the last falling interest rate cycle – which spanned from mid-2003 to mid-2006 the mortgage advances growth jumped from 12% y/y to above 30% y/y. This period of ‘easy money’ explains the massive growth in average house prices over that period. But this time things are different.
The 450 basis point cut in interests rates since December 2008 has had absolutely no impact on mortgage advances. Instead, the mortgage advances growth rate continues to slow! Absa confirms this view. They note that “despite lower interest rates, mortgage advances growth is expected to slow down further into single digits in the near future, mainly on the back of economic conditions impacting the demand for housing and mortgage finance.”
Editor’s thoughts:
Prospective home buyers are learning that affordability has little to do with obtaining finance. It doesn’t matter how much you can afford to pay on a monthly basis if the bank is only prepared to lend 85% of a home’s asking price. Do you think house prices will fall further in coming months to accommodate stricter lending practices, or do you expect successful real estate transactions to simply trend to zero? Add your comments below, or send them to [email protected]
Comments