Interest rates could hamper house price recovery
Estate agents and auctioneers have been in the news of late. In 2011 Wendy Machanik Property (WMP) hit the skids following allegations that its chief executive had misused trust monies – in most cases homebuyers’ deposits – to cover personal and business
The common thread in these reports is South Africa’s depressed real estate market. Real estate agents and conveyance attorneys have fallen on hard times since 2008, as the volume of residential property transactions plummeted. The impact of the “lean” period – beginning 2008 and extending into 2011 – is illustrated by the number of registered estate agents leaving the industry. The 78 000 estate agents plying their trade in Q4 2007 (per Estate Agency Affairs Board estimates) have shrunk to just 38 000 today. (The latest figure is taken from the EAAB 2010/11 Annual Report and includes principle, non-principle and intern estate agents that are issued with fidelity fund certificates). What can we expect from residential real estate through 2012?
A doom and gloom outlook
The overall outlook for house prices is downbeat. In their March 2012 Absa House Price index the bank concluded that “home values were in a state of deflation”. Estimates for the main macroeconomic factors affecting the real estate market were dire too. “South African is forecast to grow by a real 2.7% in 2012, following growth of 3.1% in 2011,” said Jacques du Toit, Senior Property Analyst at Absa Home Loans. “And consumer price inflation is projected to remain outside the inflation target range of 3% to 6% through 2012.”
Wind the clocks forward two months, to May this year, and you will discover that the sentiment is unchanged. The group reiterates the country’s mediocre GDP growth outlook and confirms the 6% level for core inflation, which excludes high-inflation categories such as food, non-alcoholic beverages, petrol and energy. And then they drop the “house price” bomb! Absa Home Loans predicts the prime lending rate will climb 2% by the end of 2013. This means the owner of an average medium-sized home – priced at around R964 000 – will have to find an additional R1276.94 per month to service his/her bond. (The calculation assumes a 20-year term and a mortgage bond covering 100% of the property value).
If we add the long overdue hike in interest rates to our basket of economic factors – including poor economic growth, higher consumer price inflation, the poor state of household finances, general house affordability and the availability of mortgages, and consumer confidence – then we can expect “another year of dismal price performance by the housing market,” concludes Du Toit. The Absa House Price index already reflects an unfortunate -5.3% real decline in house prices year-to-date 31 May 2012.
With sprinklings of positive sentiment
And that brings us to the sprinkling of positive sentiment courtesy the First National Bank Valuers Market Strength index. This index perceived further residential market strengthening in April 2012. The index is based on the FNB valuers’ experience of domestic property. The group requires its valuers to provide their rating of demand and supply for properties in the area where they are active (good is 100 points, average 50 points, and weak zero). FNB then compiles an aggregate demand and an aggregate supply rating, expressed on a scale of 0 to 100. A score of 50 points indicates that supply and demand are equal.
According to FNB Household and Property Sector Strategist, John Loos, the Market Strength index rose in April to 46.1 points, from its previous 45.8 points. “This is the fourth consecutive month of strengthening, predominantly due to a rise in the residential demand rating, which rose to 50.5 points in April,” he said. On average more valuers perceive strong demand than weak. Unfortunately the strong supply rating of 58.4 points kept the overall index in the “red”. “Our valuers perceived residential demand to have strengthened in April, but still give a stronger rating to supply,” concludes Loos. He noted that demand is growing at a faster rate than supply, narrowing the gap between the two, and contributing to a rising trend in the overall Market Strength index.
Although the change is somewhat positive, Loos echoes the Absa Home Loan sentiment by concluding that house prices would not shoot the lights out this year, due to ongoing weak global economic conditions. If you have to buy a house then FNB Home Loans suggest the “sweet spot” in the residential market is the so-called “Middle Income” segment, which transacts in homes valued at just more than R1 million.
Editor’s thoughts: Any positive house price sentiment is overshadowed by the prospect of the next upward phase of our interest rate cycle. Do you think house prices will post real growth through 2013 if the Reserve Bank hikes interest rates by 100 or 200 basis points? Add your comment below, or send it to gareth@fanews.co.za
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