The house price crunch is near
House price growth will come under increasing pressure over the next few months, before staging a recovery in the second half of 2008. This fact is confirmed in the latest Absa House Price Index which shows month on month house price growth for July 2007 at the lowest recorded level for seven years.
The 0.5% increase from June to July 2007 is the smallest increase since September 1999 and with inflation pushing through the 6% level has resulted in negative real house price growth. This means, after adjusting for inflation, the value of an average house has actually decreased slightly over the last month.
Readers should note that the Absa House Price Index reflects a narrow segment of the housing market and is based on transactions completed through Absa only. It remains a useful tool to establish and comment on developing trends in the domestic property market. We investigate some of the reasons house prices are coming under increasing pressure.
A nasty side effect of the National Credit Act
A number of recent economic developments are impacting house prices. In truth, the real impact is on house affordability and the knock-on effect on prices. According to Absa senior economist, Jacques du Toit the slower growth is "mainly the result of higher interest rates." Du Toit believes it is still too early to determine what influence the National Credit Act (NCA) is having on prices.
FAnews Online believes the NCA will have a much larger impact on house prices than initially thought. The reason is that the NCA requires banks to assess whether buyers can afford repayments before granting them a mortgage loan. The bank must conduct a thorough analysis of the prospective buyer's income and expenditure to determine if the remaining funds will adequately service the monthly instalment.
Absa's latest House Price Index puts the value of the average home in the middle segment of the market at around R932, 100. To service a mortgage loan of this size (assuming a prime rate of 13%) a buyer must show unencumbered net earnings of R10, 900 per month. And most South Africans have nowhere near this amount of disposable income. For the record, "the Absa House Price Index is based on the total purchase price of houses in the 80m to 400m size category (valued at R2.7 million or less) in respect of which loan applications were approved by Absa."
The NCA has also lengthened the time it takes for property transactions to complete. This has slowed demand and put more pressure on house prices, particularly where sellers are in a hurry to complete a sale.
Inflationary pressure remains
A discussion on house prices is never complete without some comment on the outlook for interest rates. While it will take a few months before the full impact of the NCA on house prices is known the same cannot be said for the impact of inflationary pressures on the domestic economy. These pressures have forced the Reserve Bank governor's hand recently and the consensus is that Mboweni will have to hike rates again later this month. Another half percent hike will take the prime lending rate to 13.5% and certainly place further pressure on house prices and affordability.
Earlier this week, members of the portfolio committee on finance were advised to consider alternatives to combating inflation with interest rate hikes. The suggestion is that the Reserve Bank gives consumers a break by fighting inflation from the supply rather than the demand side. Is this plea likely to succeed?
It is highly unlikely that the Reserve Bank will change track on using interest rates as an anti-inflationary measure. There is also little chance that the Reserve Bank will change the 6% upper target for inflation in the domestic economy. So for the time being, the status quo remains and interest rates will be hiked to calm spending and inflationary pressures.
Balancing inflation is extremely difficult and we can only hope that the coming interest rate increase does not have too severe a slowing effect on growth going forward.
Editor's thoughts:
It is extremely difficult to gauge the impact of the National Credit Act on house prices and house sales. Do you have any experience of the National Credit Act as it applies to home loan applications? We would love to hear about your experiences. Send your story to [email protected]
