More signs South Africa's housing market is recovering

FNB's latest stats show property market isn't quite as bad as it was.

The housing market may be starting to stabilise, FNB said on Tuesday as it released its latest House Price Index.

"The FNB House Price Index's year-on-year decline continued in August, but for the second successive month we saw a diminishing price deflation rate, with the index starting to show clearer signs that the market is starting to stabilise," said John Loos, property strategist at FNB.

On a year-on-year basis, the index declined by -7.4 percent in August, a significant improvement on the revised -8.5 percent deflation rate for July.

"On a month-on-month basis, although we haven't seasonally adjusted the series, the rate of increase has become too significant to merely write off as seasonal factors, with the August month-on-month rise amounting to 1.8 percent," Loos said.

The improving trend came some time after estate agents surveyed in FNB's Residential Property Barometer began reporting moderately strengthening demand levels back in the fourth quarter of 2008.

Loos said the reason for the index taking so long to get out of price deflation had been a significant oversupply of property on the market relative to demand, with many households having to sell properties due to financial stress.

He said the mild property market recovery had been overwhelmingly driven by interest rate cuts, with little help from an economy languishing in recession.

"The pressure that the economic slump has exerted on household income has been severe and as a result the household debt-to disposable income ratio remains near historic highs despite slowing credit growth."

Nevertheless, despite no meaningful decline in household indebtedness, the household debt service ratio (the cost of paying interest plus capital on debt expressed as a percentage of disposable income) had been declining during 2009.

This was due to an interest rate decline totalling 500 basis points, which had significantly alleviated the strain on the household sector, Loos noted.

"This has supported the start of declining arrears levels for FNB -- and one would imagine that other banks would see a similar picture emerging -- and one can now see a sharp decline in insolvencies statistics, with second quarter insolvencies down by about -40 percent year-on- year," Loos said.

The severity of the negative real economic growth moderated in the second quarter, with a -3 percent annualised real gross domestic product decline slightly better than the -6.4 percent of the previous quarter.

"However, it is important to realise that the economic growth indicators remain very weak despite some improvement, and given the high levels of indebtedness both in South Africa and in the USA, the expectation remains that the economic and property recovery over the next year or so will be moderate at best."

Therefore, Loos said, while it was believed that the country's property market looked set to move back into price inflation early in 2010, the expectation was that 2010 would see single digit house price inflation and probably little if any "real" house price inflation (house price inflation which outstrips consumer price inflation).

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