Prices to fall again?

The 2010 World Cup has come and gone. It has brought many potential long term benefits for SA, emanating from dramatically improved perceptions of the world regarding the organizational capabilities of the country. However, these are longer term matters and the World Cup cannot be expected to do much for the short term fortunes of residential property.

The FNB Estate Agent Survey for the second quarter of 2010 showed agents pointing to weaker demand than that of the previous quarter. Of concern, too, was a sharp up-tick in the estimated average time of a property on the market, from a previous quarter’s 12 weeks and four days to 17 weeks and one day. This suggests that price levels have got further out of touch with reality. The implications could be that prices begin to come under pressure, and indeed in June we have seen a slowing in the pace of acceleration in house price growth.

Primary residential demand continues to dominate even more than usual, as non-essential spending remains on the backburner in financially tough times.

Regarding the near term future, estate agents’ expectations have also deteriorated in the most recent survey.

We are of the opinion that this probably signals the start of a weakening trend in the residential property market, with signs of a slowing economy as well as due to a lack of further interest rate stimulus following the five percentage points’ worth of rate cutting that took place from December 2008 to August 2009. While the FirstRand base case is for a mild slowdown in economic growth, but positive growth nevertheless continuing, we nevertheless believe that the risk of a so-called "double-dip" recession remains high, given the vulnerability of some highly-indebted developed economies as well as a high level of indebtedness in our own household sector. This implies that, at best, we see house price inflation continuing in the coming years, but receding back into single-digit territory by 2011. This scenario would, however, assume no recession. Given the fragile nature of our household sector, due to having made little progress in reducing its high debt-to-disposable-income ratio, along with an already unbalanced (demand versus supply) residential market, we believe that any recessionary conditions would bring about another bout of national house price decline.

For the SARB, setting interest rate policy could be challenging in the times ahead. The US example of the past decade has perhaps shown us that, when interest rates move to abnormally low levels, the pain merely gets delayed, and when rates rise by abnormal magnitudes thereafter, the pain on the household sector and the housing market can be particularly severe.

So, while it is tempting to wish for more interest rate cutting in order to alleviate pain in tough economic times, we will need to consider the implications at a later stage when, ultimately, interest rates rise.

At present, we are of the opinion that the SARB has a nicely balanced interest rate stance from a property point of view, having given significant relief to those with debt, but not stimulating strong new household sector borrowing growth. While it may be tempting to wish for strong borrowing growth, we believe that it would be far better in the long term for credit growth to remain slow, and for SA’s high household debt-to-disposable income ratio to be worked down to significantly lower levels. That would provide more of a buffer against any unwanted shocks, something which is sorely lacking at present.

Article by: John Loos and Ewald Kellerman - www.iafrica.com