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No winter warmth here

However, despite the hammering property has been given globally and locally, the SA house market has shown itself to be amazingly resilient, with an expected 10% to 15% peak-to-trough fall far milder than that of many other countries.

Beyond the fall in prices, there is little clarity. There is an oversupply of house price indices for March/April, with price falls ranging from 2,7% to 10,2%. Data in the FM’s quarterly suburb watch is trendless, with the few first-quarter property transfers revealing little more than volatility. Leading estate agents seem to be gloomier than the indices, most of which bunch around -3% so far and indicating -7% or so by year end.

Pam Golding Properties executive director Ronald Ennik sticks to his forecast of a 10% fall in 2009. Seeff chairman Samuel Seeff reckons that by the end of 2009 the national average price will be as much as 15% down from its 2007 peak. That would nearly equal the record 1985-1987 decline in the Absa price index.

The outlook has changed fast. Absa property strategist Jacques du Toit was confidently predicting that Absa’s price index would end the year at -3% after falling to -4% in midyear. But after the April index - down 2,7% - he was talking about price pressure possibly continuing through the year.

Scouring the many sub sectors that make up the property market data from Lightstone Risk Management gives little comfort. The "affordable" sector (below R250 000) was the only subsector rising year on year (by 4,4%) in March, but its monthly decline is dramatic, at 2,5%, pointing to an annual decline of over 30%. This could happen as soon as September.

Lightstone’s month-on-month decline is a clear leading indicator. For instance, the affordable sector’s June 2008 monthly price change of 1,23%, multiplied by 12, "annualises" to 14,8%. Four months later, the year-on-year affordable index for October was nearly the same at 14,31. So it has gone each month since.

The month-on-month change of 1,5% in January this year annualises to 28,3%. If the relationship between monthly and yearly indices continues as it has, it suggests the affordable housing market is about to become a horror story by June this year, with house prices plunging.

Falling interest rates may not help much, even though they are down by 3,5 percentage points and pundits expect rates to drop another two percentage points.

Nor will the declining debt-service ratio of SA households change things. FNB property strategist John Loos, in his April price index, says insolvencies had fallen from a year-on-year 102% increase in the second quarter of 2008 to a 26,1% rise in the fourth quarter, the period covered by the latest Reserve Bank data.

But the problem is that banks just aren’t lending. They remain in hibernation (see Cover Story), snuggling around their credit ratios with more than half their home-loan applicants out in the cold clutching "decline" notices.

The FM’s suburb watch in February upset bank executives when it blamed them for the property downturn. FNB home-loan MD Jan Kleynhans and Standard Bank CEO Sim Tshabalala say banks are merely transmitters of broad economic conditions.

This is partly true. But banks amplified their transmission of the recent boom times with their heavy promotion, easy approvals, 100% loans-to-value and interest rates as low as 2,5% below prime.

House prices rose by 400% in a decade and bank mortgage advances climbed from a little over R200bn to nearly R1 trillion. Many lucky people sitting with home loans granted at 2,5% below prime a few years ago could find themselves paying interest rates as low as 7,5% by December.

Now that global finances are in crisis and the SA economy is in recession, decline ratios have risen nearly 50% to over 60% of applications declined, loans over 90% are rare, and 16% of all applicants end up with an interest rate more than 1% below prime. Banks feel they no longer need to advertise their home loan business. Even that gives a more optimistic picture than it should. Banks would really prefer not to lend on any terms at the moment.

Tshabalala says it’s not that bad, at Standard Bank at least, where mortgage advances have actually grown this year. But he should read Loos’s FNB report on March mortgage advances. Mortgage payouts by banks plunged by 57% from the year before. Capital repayments to banks by clients fell even more dramatically, by 71%.

"The trend in capital repayment value on banks’ mortgage loan books explains much of why we still have positive growth in total mortgage loans outstanding, despite such sharply declining payouts," says Loos.

So it is that bad, with the smart money hanging on to its low-interest debt while banks drip-feed anxious new borrowers on more onerous terms.

There is some reward for those who have waded through this suburban gloom. Prices in SA’s 10 most expensive suburbs, with prices above R6m, continue to rise as they do in the six at the bottom of the 5 170 proclaimed suburbs in SA. And it seems popular country hamlets are also holding their prices.

Seeff expects banks to start sniffing around for new mortgage business before the year is out, though there’s no reason why that should happen while the economic crunch follows the financial crisis. Loos expects prices to rise 6% in 2010.

Article from: www.netassets.co.za