March house prices down

As expected, according to the latest FNB house price index that was released on Wednesday, house prices are down by 7.8 percent year-on-year in March after declining by 6.2 percent year-on-year in February.

This was despite the FNB Residential Property Barometer already having shown some improvement in residential demand since late 2008 and is believed to be the result of a significant oversupply of stock still prevalent in the market.

Such oversupplies come from a household sector that still faces significant financial stress. On a quarter-on-quarter annualised basis, the SA Reserve Bank reported last week that real disposable income had seen negative growth to the tune of minus 1.9 percent in the fourth quarter of last year, the second successive quarter of negative growth, driven by the onset of recessionary conditions in the South African economy.

"The weak economic environment is contributing to a significant amount of 'offloading' of property with the FNB Property Barometer survey reporting estate agents' estimates that about 26 percent of total sellers are selling in order to downscale due to financial pressure," said FNB property strategist John Loos.

Decline will continue for most of 2009

"As a result of oversupplies, it remains likely that this situation of national year-on year house price decline will continue for most of 2009."

On a month-on-month basis minus two percent deflation was recorded, unchanged from the minus two percent of the previous month.

"Whereas until recently it was the market for two-bedroom houses and less where the weakness appeared to be worst, as compared to the three-bedroom market, it would appear that the differential has narrowed as the three-bedroom market also reflects increasing strain," Loos said.

According to the index, for the first quarter of 2009, the average freehold two-bedroom house price — R315 468 — declined by 13.2 percent year-on-year.

This represents a further deterioration from minus 10.3 percent year-on-year in the previous quarter. This is believed to be reflective of the financial strain that lower income groups are experiencing as much of this segment is believed to be found in such lower income areas.

The sectional title 'two-bedroom and less' market continued to fare considerably better than its freehold counterpart, but nevertheless continued with its very weak performance in the first quarter.

The average price of sectional title two-bedroom houses — R623 613 — showed a mild 1.2 percent year-on-year rise using revised figures while the average price of sectional title units with less than two bedrooms — R442 896 — declined by 3.3 percent.

The three-bedroom market has seen most of its recent price inflation coming to an end.

The average price for sectional title three-bedroom units — R903 544 — showed slight year-on-year price inflation of 0.2 percent in the first quarter, down from 2.2 percent in the previous quarter while the average price of the mildly more affordable freehold three-bedroom category — R799 087 — also inflated by a mere 0.2 percent, down from 3.9 percent.

"It is still believed that the apparent superiority in performance of the three-bedroom market until very recently, compared to two-bedroom and less sectional title property, is explained by the belief that much of the buy-to-let surge back in the boom years was focused on the sectional title two-bedroom and less market as was much of the first time buying attention that we saw at the time, and that these forms of demand are more cyclical than established family demand that possibly dominates the three-bedroom market," said Loos.

Tough economic times have recently become a major problem for most market segments

"However, tough economic times have more recently become a major problem for most market segments and this may well have negated any apparent advantage that the three-bedroom market may have had due to a lack of reliance on the more cyclical buy-to-let and first-time buying demand."

Looking ahead, Loos said: "Little changes to our expected outlook for 2009. Tough economic times make for a slow road back to health in the market.

"The downward trend in debt-to-disposable income ratio is expected to resume in the first quarter and the debt-service ratio should get additional downward impetus from interest rate cuts this year," he said.

He noted that improvements in the debt service ratio were a great predictor of future improvement in mortgage loan default rates and as such it is realistic to expect that non-performing mortgage loans will start to decline later this year.

"The bottom line, though, is that weak economic conditions and poor disposable income growth make that progress towards a more manageable household debt situation slower and this in turn can be expected to contain the pace of residential demand growth as well as the recovery in house price inflation.

"Therefore mild residential demand recovery as 2009 progresses remains the expectation, but year-on-year house price deflation is expected to be with us for most of the year until such time as oversupplies are mopped," he said.

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