No spark from latest house price statistics
The latest Absa House Price Index, released 6 July 2009, confirms the declining trend in house prices recently reported by Standard Bank and FNB. According to Absa, house prices fell a nominal 4.4% (year-on-year y/y) to June 2009. Absa, which publishes house price statistics for small, medium and large houses, confirmed that the ‘average’ middle segment house now changes hands for R917 600. This is approximately R33 600 less than the peak value recorded in February 2008. When you throw inflation into the mix, house valuations have retreated to 2005 levels.
In an interview with MoneyWeb, Absa economist Jacques du Toit warned that “house price deflation would accelerate on to late 2009.” He said the continued slowdown was in part due to the impact of high interest rates (through 2008) on the household sector and consumer. The balance of the crisis was due to strict lending criteria and generally poor economic conditions. “These factors all contributed to the house price deflation that we’ve seen up until mid-2009,” said du Toit. How long will it last? “We expect this [declining] trend to continue for much of the rest of the year,” said Du Toit.
Prices falling across the board
House prices have declined in each of Absa’s categories. The price of the average small house (80m² to 140m²) declined a nominal 4.7% y/y. The average price in this category is R653 000. The average nominal price of medium-sized houses (141m² to 220m²) declined by 3.1% y/y, to R917 600. And although slightly more resilient, large houses (221m² to 400m²) fell 0.5% y/y to about R1 381 700.
What the bank statistics don’t reveal is the level of activity in the residential property market. There is no doubt the number of completed transactions is way down on the boom scenario that played out between 2003 and 2007. According to the Reserve Bank’s Quarterly Bulletin June 2009 mortgage advances “continued to rise, but their twelve-month growth rate decelerated from 13.2% in December 2008 to 11.3% in March 2009 and further to 10.6% in April as stricter lending criteria and higher deposit requirements by the banking sector continued to dampen mortgage business, especially residential mortgages.” In other words – it’s more difficult for potential home buyers to secure finance.
Banks are enforcing rigorous checks before extending mortgage finance. The latest oobarometer (published by home loan originator ooba) reports average declines on first home loan applications at 47.5% for June 2009, with only 17.3% of these declined applications being overturned at a second bank. They reveal that the average deposit on a house transaction now stands at 18.9% of the purchase price!
Like chasing a mirage
Each time we write about house prices we share analysts’ predictions for the coming turnaround. And each time – without fail – these predictions are shifted out a few months. In the first half of 2008 they predicted a recovery mid-2009. By Christmas of that year, house prices were going to recover in Q3 2009. Today the target has shifted to the first quarter of 2010! “Based on these factors and the latest trends in the economic conditions, the expectation is that the property market will most probably continue to suffer for most of this year and only start to pick up gradually towards the end of this year and in the early stages of 2010,” said Du Toit.
Du Toit expects “lower interest rates to work through to their full extent later this year and early next year,” He believes the economy will also show signs of improvement as we enter 2010. We don’t think we’re out of the woods just yet. Those touting an impressive economic recovery in the short-term are erring on the optimistic side. All we can look forward to for the balance of this year is declining corporate earnings and rising unemployment. Under these conditions consumers are going to remain extremely cautions, meaning the delay of most non-essential purchases.
Don’t be surprised if by December 2009 the economists shift their housing market turnaround point to early 2011! Because predicting a house price recovery is a bit like chasing a mirage in the desert… Just as you think you’ve nailed the turning point, statistics push it beyond reach again.
Editor’s thoughts:
Valuing an immovable asset is difficult at the best of times. In our view the only way to determine the true value of a house or commercial property is to complete a sale under the prevailing market conditions. Until that point you don’t know what your house or office block is really worth. The banks’ property indexes (for the most part) reflect property values based on physical recorded transactions. Do you pay any attention to house price statistics? Add your comments below, or send them to [email protected]
