Safe as houses – think again!

House prices in South Africa continue to fall. That’s according to the latest Absa House Price Index, released 4 March 2009. It concludes the average nominal price of middle-segment housing “dropped by 1.3% year-on-year in February 2009 to around R950 800

Absa says this is the third consecutive month of nominal price contraction and adds that on a month-by-month basis prices have been declining for seven months, since August last year. Since then the average price achieved on a middle-segment home has only retreated R15 000 from the all-time high of R965 800. Absa’s final word on the matter is that “the household sector [will] continue experiencing some financial strain this year.” They say lower interest rates won’t offset the effect of a “poorly performing economy.” House prices will remain under pressure for the rest of 2009 and are forecast to drop by a nominal 3% to 4% this year.” Even so, South African homeowners are streets ahead of their developed market peers. House prices in the US and UK have fallen off a cliff recently.

Mortgage originator confirms downward trend

Absa’s bleak assessment for the domestic real estate market is confirmed by mortgage originator ooba. The group launched their own property barometer in the latter half of 2008. Ooba’s latest report confirms a decline of 0.7% in the average house purchase price year-on-year to February 2009. According to ooba a house which would have fetched R833 461 in February 2008 is now worth R827 553. “Property prices continue to fall in the tough economic climate,” said ooba chief executive Saul Geffen. The group expects house prices to decline further during 2009 with a recovery pencilled in for the first quarter of 2010. Geffen says the 6.2% improvement month-to-month (February over January) does not signal a reversal of the softer trend. “We have seen a shift in weighting to more expensive properties, which suggests that higher income individuals are less sensitive to the economic woes and conservative bank lending practices,” he said.

Real challenges to the market remain. Restrictive lending practices applied by the country’s top banks are here to stay. “On average and across the banks, 60% of all home loan applications where a willing buyer has tried to buy a home, are being rejected outright,” says ooba. Banks are also demanding higher deposits which make entry for first time buyers even more difficult. Geffen says “banks are demanding significantly higher deposits as a percentage of the purchase price.” The average deposit paid on a property transaction is up from 16.4% to 24.1% over the last 12-months.

Triple whammy knocks home loans approval

We can think of three reasons for the tougher loan conditions. First, the tough conditions introduced by the country’s groundbreaking National Credit Act. Second, the ongoing credit liquidity concern triggered by the global financial system chaos. And third is the surge in impairments following the country’s lengthy battle with higher interest rates between 2006 and mid-2008. The impact of this near two-year interest rate assault is profound. Shell shocked consumers will struggle to recover from the record high debt-to-income and debt-repayment ratios for some time. How bad will things get?

To answer this question we turn to recent comments from Alliance Group’s chief executive Rael Levitt. He concludes that South Africa’s “residential property market is in the third quarter of a technical recession” and that optimism from real estate agents as we enter 2009 is misplaced. “The reality,” says Levitt, “is that [the housing market] is going through a startling downward correction.”

How long will it take to ‘catch up’ four missed mortgage payments?

Levitt’s assessment of the property market is probably more accurate than the house price indexes discussed earlier. Absa and ooba base their findings on completed property transactions and make no reference to economic forces of supply and demand. Levitt, in contrast, can see a disaster looming. He says that more than 130 000 mortgage holders were in arrears one or two payment in Q4 2008 and another 80 000 were in severe distress, having missed four or more payments. “According to [the group’s] Distressed Asset Index, 80% of bondholders who are in severe mortgage stress will most likely have to sell or lose their homes either voluntarily or forcibly,” he says. These forced sales will create huge supply in a market where demand is limited due to bank-imposed financing constraints.

Homeowners and prospective buyers who expect coming interest rate cuts to reverse the downward trend are naïve. It takes between six and eight months for the impact from an interest rate adjustment to filter through to the real economy. Lower interest rates will make houses slightly more affordable for new buyers; but they’ll do little to help the 80 000 mortgage holders in severe stress. They’re going to have to get rid of their primary asset despite this relief. When supply outstrips demand the buyers usually have a field day. But the sensible buyer who is prepared to wait a bit longer will snap up their dream house at an even bigger discount.

Editor’s thoughts:
Interest rate cuts will bring welcome relief to homeowners this year; but they don’t guarantee improvements in house prices. Banks, mortgage originators and auctioneers agree that prices will decline further through 2009. Would you buy a house today, or wait six months before taking the plunge? Add your comments below, or send them to gareth@fanews.co.za