You can thank Absa, FNB, Nedbank and Standard Bank SAs big four banks for the the local property markets relative resilience. Yes, they broke some common-sense lending rules before the National Credit Act was passed, but for the most part they capped mortgage repayments at realistic levels, protecting house prices during the downturn.
A very good decade
Residential property grew in value each year between January 2003 and
December 2007, inflation-busting growth that meant you had to give something
back in 2008 and 2009. Absa says house prices fell across all market segments,
so nobody was spared. Affordable housing contracted 4% in real terms in
2009, middle-segment houses plummeted 6,8% and luxury houses 5,8%.
FNBs House Price Index suggests if you purchased a home in July 2000 it would have appreciated 195,4% over the next decade. An investment of R200 000 would have grown to R588 000, providing annual compound growth of 11,5%.
The reality is that house prices grew far too rapidly during SAs property boom, and were already falling when Statistics SA confirmed the countrys technical recession in May 2009.
What was behind the domestic house-price crunch? Analysts say the decline
in property transaction volumes is directly linked to the indebtedness
What can you expect from house prices and other property investments through 2010 and beyond?
Towards the future
Your property crystal ball
Prospects for residential property hinge on two factors: the outlook for domestic and international economies, and affordability. SAs economy is growing again, in line with the rest of the worlds. Gross domestic product expanded in the third quarter 2009 (+0,9%) and carried this momentum through the fourth quarter (+3,2%). Despite this, the economy contracted by 1,8% over the full year.
Economists have sharpened their pencils, and predict between 2,3% and 3% GDP growth for 2010. You could say the economy is headed in the right direction. The stumbling block is affordability.
Affordability will be driven by trends in house prices, household income, interest rates and banks lending criteria, says Jacques.?Absa measures affordability using the ratios of house prices to household disposable income, and mortgage repayments to disposable income.
FNB Property Strategist John Loos comments that SAs household sector is battling to recover from the recession. At present its debt-to-disposable income ratio remains not far from the historic high it reached in 2008. This is the key reason why the response among residential buyers to the massive interest rate cuts in 2009 has been far more subdued than it was after the 1999 and 2003 cuts, which came at a time when South Africa had far lower debt levels.
Local experts differ on the outlook for residential property.
Saul Geffen, CEO of mortgage originator Ooba, believes 2010 will see market conditions continuing to improve, and increased transaction volumes and price growth will be sustained.
Absa downplays Sauls enthusiasm, warning that you could be in for another slow year. The bank predicts 6% in nominal terms through 2010. With a projected average consumer price inflation rate of 6%, no real price growth is expected this year, says Jacques. Prospects for 2011 and 2012 arent much rosier, with nominal growth of 10% pencilled in three years from now.
John Loos says the Soccer World Cup will promote SA as a place to do business and this, ultimately, will be good for our long-term economic growth and therefore our residential property market. But, right now things promise to be only mildly better for those of us involved in some way in residential property. Well still have to work hard for our money,?while investors will still have to be in it for the long haul.
According to Rode & Associates, house prices remain high in real terms. Erwin says the house price cycle plays out over long periods of time, and the two-year real price declines just witnessed will probably be followed by another five years of negative real growth.
Building sector slowdown
House prices will remain subdued for as long as a situation of oversupply persists. At the moment there are plenty of signs of excess residential properties. Developers are stuck with so much stock that many new initiatives failed to get off the ground.
The latest building statistics indicate that the property market has experienced difficult times, and taking account of current demand-and-supply conditions, building activity will take some time to show some positive growth, Jacques says.
One of the reasons for this is that buy-to-let investors and those relying on second homes for extra income only achieved an average 2% escalation in annual rents, at latest measure.
For your typical three-bedroom townhouse in a middle-class suburb, your net income yield before gearing would be around 4%, observes Erwin. He adds that buy-to-let loses its appeal as an investment strategy under such conditions.
Just Property Group CEO John Roberts agrees. The group has conducted virtually no business with this category of investor in recent months. Those who are buying at the moment are snapping up properties on foreclosure and trying to flip those properties straight away. There are indications that rental defaults people who simply dont pay their monthly rents are as high as 22% in some areas. This statistic scares the living daylights out of?buy-to-let investors!
Should you be buying houses right now? Erwin doesnt think so: Without a doubt, if youre in the market today for shelter, then rent is better than buy. A disciplined saver will be better off renting (and reinvesting the savings) than buying over a five-year period.
Running out of kilter
Commercial property is a complex mix of offices, shopping malls, industrial properties and hotels. The upswing in the office and industrial sector is out of synch with the residential property cycle.
Erwin says the upturn in this sector started some time between 2002 and 2004: When the recession struck, office and industrial properties werent as overstretched as the residential side. But the recession has taken its toll: demand for commercial space is in decline, placing rentals under pressure.
Were not very bullish on the sector on a 12-month view, comments Thabo Motloung, listed property analyst at Old Mutual Investment Group SA. The group expects vacancies to increase, particularly office space, due to the number of un-let speculative developments coming on stream. Rentals at shopping centres wont improve until retail sales numbers turn around. Office and retail properties are already under pressure, but the real test will start at the beginning of 2011 and run to the end of 2012. Prospects in the listed property sector remain subdued and you should remain underweight listed property for the time being.
Erwin offers a slightly more positive prognosis: Assuming consensus growth for the economy over the next three years, I think the industrial and office markets will start picking up in two years.
There are some areas of commercial property development that should outperform over three years theres been a big move to mixed-use developments, which combine office, housing and retail space. The popular Melrose Arch development in Johannesburg is an example of this concept.
Given whats happening to the costs [in terms of time and money] of travelling, residential opportunities close to work nodes are the way of the future, says Erwin.
Where are all the tourists?
You cannot talk property without having a look at the 2010 FIFA World Cup.
Many homeowners are hoping to make a quick buck by renting out their properties during the period. They may be disappointed, and certainly havent factored in the lost rentals while they prepare the properties.
The event may be a supporting factor to broader economic activity,
and also the property market, says Jacques. The real impact could
only be measured after the event, he adds.
On the commercial side, it appears the hospitality industry has created
a terrible oversupply of rooms in certain areas.
Article by: Gareth Stokes - www.thepropertymag.co.za