No miraculous rebound for house prices
“Despite the fact that interest rates have dropped by 1.5% since December 2008, and that more rate cuts are expected, it is unlikely that the house market will stage a miraculous rebound during 2009,” says John Lottering, research editor for Rode and Associates. His comment formed part of the February 2009 Lightstone Residential Property Indices’ assessment of the domestic housing market. Lightstone uses “repeat sales inflation data for individual residential properties” from the Deeds Office and other sources to compile this report. They say that house price growth for the year ended October 2008 was marginally negative (at -0.1%) and that luxury and high-value properties declined in nominal terms between 3% and 2% over same time.
The larger financial institutions’ 2009 numbers confirm this trend. Absa House Price Indices, published 4 February, conclude “the average nominal price of middle-segment housing was marginally down by 0.03% year-on-year in January.” They say that middle-segment housing declined an average 6.9% in 2008 after rising 7% in 2007. It’s the first time since 1999 that house prices dropped in real terms! Who do we blame for the dire state of the country’s residential property market? Most people point to the vicious rising interest rate cycle which began mid-2006 and continued to 2008.
Interest rates not the only price driver
But interest rates aren’t the only factor contributing to the recent slowdown in residential property prices. We’ve often mentioned the impact of the conditions imposed by the National Credit Act to avoid future over indebtedness. Banks cannot grant new home loans without a proper assessment of affordability. Global economic developments have also forced banks to change their lending criteria meaning the days of 100% bonds are over. There’s also an overhang of unsold properties. Auction Alliance estimates as many as 35 000 mortgage holders are in severe stress – more than four payments in arrears – and that 80% of these houses will have to be sold!
And we shouldn’t be surprised to learn that housing demand shadows the prevailing economic conditions. The latest GDP data from Statistics SA points to the imminent arrival of a technical recession on our shores. To satisfy this definition a country must record two consecutive quarters of GDP contraction. With South Africa’s Q4 2008 number at -1.8% and a similar contraction forecast for the first quarter in 2009 we’re already there. Incidentally the Q3 2008 growth of 0.2% didn’t impress either. Lightstone confirms this less than optimistic outlook, saying the Reserve Bank’s “composite leading business cycle indicator has been heading steadily south since March 2008!” “With increasing defaults, the poor [growth prognosis] and an uncertain international financial environment, banks are likely to be cautious in granting credit,” says Lightstone. And this means “house price growth is likely to disappoint in 2009.”
Could Mboweni announce an ‘emergency’ cut?
Will Reserve Bank governor Tito Mboweni provide an emergency rate cut in light of these shocking growth numbers? The press is baying for him to do so. And while we could join the throngs of analysts and homeowners debating the issue we argue there’s not much point. The reality is another 100 basis point cut will do little to cure the country’s housing market woes. A few hundred rand per month will provide some relief for struggling homeowners; but cannot help the thousands who are more than four payments behind on their mortgage.
Consider the problem from another angle. Under new credit regulations an extra R500 per month in disposable income doesn’t generate much of an increase in the bond a potential buyer can secure. Add to this the likelihood that buyers will only receive a 90% bond and the outlook is crystal clear. If you purchase a house valued at R1m you will have to find R150 000 cash up front (R100 000 deposit and R50 000 for transfer, attorney and bond costs). You will have to scrape together R11 191 each month to meet the repayment on a R900 000 mortgage bond. And you’ll have to achieve this with a net income as little as R30 000!
Editor’s thoughts:
Valuing a home can be tricky – because whatever number you conjure up the only way to find out what it’s really worth is to sell it! If we believe the statistics then the R1m house purchased at the beginning of 2008 should (excluding the impact of transaction fees and estate agents) sell for R995 000 today. But that’s not the case! Do you think interest rate cuts will be enough to prop up the ailing residential property market? Add your comments below, or send them to [email protected]
