House prices to drop two percent this year
Buying a house is an expensive exercise. Aside from the hefty deposit most of the country’s banks demand, you also need cash to cover transfer duties, attorneys’ conveyance fees and bond costs… To seal the deal on a R1 million home you’ll need to save as
The FNB House Price Index for February 2012 points to an acceleration in house prices from a revised January growth rate of 6.1% to 6.6% year-on-year. FNB Household and Property Sector Strategist, John Loos, ascribed the improvement in nominal growth to a late-2011 up-tick in real economic growth. South Africa’s gross domestic product came in at a 3.2% quarter-on-quarter for Q4 2011, up from 1.7% in the third quarter. Although this is the highest year-on-year growth since July 2010 the impact of higher consumer price inflation (at 6.3% in January) sent house prices down 0.2% in real terms.
An improvement in lending conditions
Why is house price growth so soft? Most analysts point to a combination of the credit crunch of 2008 and the locally implemented National Credit Act to explain the sorry state of the residential real estate sector… Although these factors contributed to the current soft housing market there is little doubt we were in overheated house price territory as early as 2004. A look at FNB’s House Price Index going back to 2002 confirms that house price growth has been in decline since December 2005.
Over the past three years one of the major obstacles to house price growth has been the banks’ reluctance to extend mortgage finance. There are promising signs that the banks are more willing to lend than before… “We are seeing an increase in home loans’ competition as banks focus on market share once again,” said Loos. “As yet, we don’t have Reserve Bank stats for Q4 2011 mortgage loan grants – so we can’t confirm the suspicion that mortgage lending is strengthening after slowing through much of 2011.”
Another leading indicator for house prices is the FNB Valuers Market Strength Index (MSI). This index confirmed a gradual deterioration in supply towards the end of 2011 – a positive step towards restoring the residential property balance. Loos observes that the FNB MSI (which represents the demand rating minus the supply rating) has moved up from 45.3 in January to 45.9 in February 2012. A level of 50 or more would indicate that house demand exceeds supply, which is bullish for house prices. The group’s Estate Agent Survey demand rating also returned to positive territory in the third quarter last year. Unfortunately this momentum has not carried through to the fourth quarter. “We suspect that the relatively high house price growth rate of 6.6% year-on-year in February 2012 will probably not be sustained for more than a few months,” said Loos.
A torrid time for buy-to-let investors
The outlook for buy-to-let property is equally downbeat. The latest FNB Estate Agent Survey confirms that only 8% of residential property transactions fall under the buy-to-let heading. This is some way off the 25% recorded in the final quarter of 2004. Loos singled out four reasons for the continued “soft” performance from this investment category. First – because households remain under significant financial pressure. “The sources of pressure have been a mediocre economic performance [coupled] with sharp increases in the costs of high frequency consumer purchases,” he said. Petrol and food remain major contributors to domestic inflation.
The second detractor from purchasing a second dwelling is the ongoing increase in municipal rates and utilities tariffs. “While utilities tariffs are generally passed on to the tenant in a rental property, the general levels of financial pressure in recent years have meant that the negative impact of utilities tariffs and other CPI inflation items, on tenants, limits the ‘pricing power’ of landlords when it comes to hiking rentals,” noted Loos. A third deterrent to buy-to-let investors is weak residential rental inflation, pinned at 4.5% as at January 2012. Although FNB observed a slight recovery in this measure through 2010 it petered out late in 2011 and looks certain to remain slow in the near term.
The fourth and final reason singled out is the noticeable increase in first time buying through 2011. Young rental tenants are moving out of the rental market and into home ownership, further dampening rental demand… “The 2010/11 rental market [improvement] appears to have been short-lived,” concluded Loos. “Nevertheless, there are some signs that certain rental market fundamentals are improving.” He said that owners of buy-to-let properties would also benefit from ongoing improvements in the Tenant Profile Network survey result, currently showing 81% of tenants in good standing with their landlords.
If you hope to turn a profit on your primary residence you will have to hold onto the asset for longer than you bargained for. FNB Home Loans has revised their average house price growth forecast for the entire 2012 to 4.2%. Given inflation at around 6.5% your residential assets will “lose” 2% in real value this year. And Erwin Rode, property economists at Rode & Associates, warns the house price slump could continue until 2014 and beyond!
Editor’s thoughts: Your clients’ primary residences have to feature in the financial planning process. At the very least your clients must consider how their houses will contribute to retirement funding – whether by way of “rent free” accommodation, income generation through letting out all or part of the property, or contributing to retirement capital by selling and downsizing. Are you concerned about the impact of declining real house prices on your clients’ retirement plans? Add your comment below, or send it to gareth@fanews.co.za
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