The build up of a substantial oversupply of residential housing stock is sustaining the drop in home values experienced of late, FNB said on Monday.

Its latest house price index continued to decline in May to -11.3 percent year-on-year, it said in a statement.

This represented a deterioration on the revised -9.2 percent rate of year-on-year decline recorded for April.

It was also the sixth consecutive month of year-on-year decline in the house price index, FNB said.

On a month-on-month basis, the rate of deflation was minus three percent in May.

The deflation was a result of oversupply, with selling due to financial pressure being a key driver of supply, FNB added.

"With South Africa officially now in recession, conditions in the South African economy are hampering the pace of residential demand growth despite a series of interest rate cuts having already taken place," FNB property strategist John Loos said.

Domestic interest rates had now declined by 450 basis points in total since the start of rate cutting in December 2008.

"This should bring some stimulus to a very credit-sensitive market such as the residential property market.

"However, unlike the 2003 aggressive interest rate cutting which took place in good global and local economic times, the current stimulus from interest rates is to a great extent offset by an economic recession which contains growth in household purchasing power," Loos said.

As such, the expectation of nothing more than a very mild improvement in residential demand during 2009 continued, and with oversupplies still believed to exist on the market, house price deflation was expected to be around for most of 2009, Loos added.

"However, I believe that the worst year-on-year price deflation will show in the figures around mid-year, and that during the second half of the year we'll begin to see the rate of decline subsiding," Loos said.

He noted that at the SA Reserve Bank's most recent interest rate meeting, Governor Tito Mboweni had started to prepare the market for a possible pause in interest rate cutting, "so although all future interest rate decisions depend on how future economic events unfold, we should not expect too much in the way of interest rate cutting from here forward," Loos said.

Sapa

Article from: www.iafrica.com