Housing analysts finally face reality
The latest Standard Bank ‘Residential property gauge’ reveals that the median house price in South Africa recorded no growth year on year in December 2007. This is the lowest single month growth since June 2000 when a negative number was recorded. The bank attributes the December slowdown to lower than expected year end volumes driving the median house price down.
Growth for 2007 came in at a disappointing 8.3% which given current inflation numbers is nearing zero percent real return. Analysts are quick to remind real estate investors that “between January 2000 and December 2007 residential property prices as measured by the Standard Bank median house price increased by 182% in contrast to the goods’ price inflation rate of 60% in the same period, giving a holding period return of 122% in real terms.”
But these numbers will be of little value to home owners and investors who jumped on the property wagon over the last 12 months. They would have been hoping for a repeat of the 31.9% nominal return achieved in 2005, or the 24.6% growth enjoyed by homeowners in 2006.
Retail and motor vehicles sales are leading indicators
Any doubts over the impact of the Reserve Bank’s repeated interest rate hikes have now been dispelled. Retail sales growth numbers, already in steady decline in the latter half of 2007, are expected to sink further in 2008. Standard Bank reveals that retails sales “grew by an average annual rate of 8.8% during the January to June period of 2007 compared to an average annual growth rate of 3.1% between July and November.” A quick look at the price performance of some of the JSE’s clothing and furniture retailers confirms the collapse.
But the real loser of the last calendar year is the motor industry. New passenger sales have been in free-fall, dropping almost 20% in December 2007 compared to the corresponding period in 2006. If we apply the economic definition that defines a recession as two consecutive quarters of contracting growth then the domestic market for passenger vehicles is already there. Sales of new passenger vehicles have been lower than the corresponding period for 11 consecutive months.
The bank reveals that “The average growth in new passenger car sales was 10% in 2007. This is in sharp contrast to the average growth of 13% witnessed in 2006.” All numbers point to an extremely difficult 2008 for motor vehicle dealers.
Relief unlikely in 2008
We believe it will take more than an interest rate cut to stimulate growth in the housing market. Those who believe house prices (and unit sales) will magically rebound in the second half of 2008 will have to moderate their expectations. There are simply too many obstacles to domestic real estate performance at present.
Top of this list is the impact of repeated interest rate hikes on consumer disposable income. Standard Bank reveals that “The household debt to disposable income ratio for the third quarter of 2007 was at 77.4%. This high level of household debt has increased the portion of household income that is used to service debt, exacerbating the constraints on consumer liquidity.” In a stable interest rate environment house prices would have continued to grow in line with wage increase – but the wage increases South African consumers have received in recent months have been inadequate to cover the full impact of rising debt repayments. Houses are simply less affordable today than any time in the last two years.
Standard Bank believes that the residential property market in “2008 [will be] characterised by single digit growth, with the possibility of negative year-on-year growth rates in some months.” And if this occurs we could easily witness a negative real return for the full year.
Editor’s thoughts:
Although estate agents remain positive there is little doubt that buyers are calling the shots in the residential property market at the moment. Sellers are waiting much longer to conclude a sale which is frequently well below their asking price. With the market likely to languish for the next year or two, would now be a good time for buy-to-let investors and other bargain hunters to enter the market? Submit your comment at the end of this article or send them to [email protected]
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