What will property prices do in '07?

Intellectual Property Magazine

House prices will remain relatively flat this year but there are still pockets of surprising activity and demand. We have just come through a rollercoaster of a year in 2006, both politically and economically.

The housing market has gone off the boil and looks like settling to a more sustainable level. Let’s face it — annual house price growth of 30 percent could not last — nor is it desirable.

The brakes are on

The residential property market peaked towards the end of 2005 partly because the stimulus given to the market by steadily falling interest rates had come to an end. The rate increases, which began in June 2006 as the cycle turned, simply put further pressure on the brakes.

However, the remarkable thing is that the housing market has remained buoyant, with house price growth having slowed, but house prices have not fallen, and are not expected to.

New areas spring to life

There are still segments of the market which outpace others, notably the emerging black middle-class. And now we have a scarcely noticed emerging black working-class, equally aspirational, making its mark in the lower-priced housing market segment. They are beginning to earn more, enjoying the upward trend of national income growth.

Over the past three years, according to Finance Minister Trevor Manuel, one million new jobs have been created, while annual income growth per capita averaged almost eight percent.

The fact that more people are earning more money has been a key factor in fuelling the consumer spending spree. This has tended to put a damper on the Reserve Bank’s disciplinary measures. Loan repayments increase with interest rate hikes — but there’s more disposable household income with which to counter the blow.

How far will the Reserve Bank go?

Growth in GDP is still below five percent, which isn’t too bad, but is well below the GEAR target of six percent. Push interest rates too high and we risk knocking our growing economy on the head.

Standard Bank’s December Residential Property Gauge comments: “Structurally, inflation remains quite low; over the past three years pressure has mainly emanated from food and energy costs. This underpins our expectation that, after the current upswing, inflation and, eventually, interest rates will moderate.”

The international oil price has an important impact on inflation. Therefore, the recent drop in oil prices to almost $50 has helped restrain the rate of inflation from breaching the Reserve Bank’s upper target level of six percent. Without this, interest rates would probably have risen much more.

February rate hike not ruled out

Standard Bank is of the view that CPIX inflation could remain target friendly in the short to medium term, even though it is likely to come very close to the inflation target’s ceiling, and it may remain in the upper part of the inflation target for a prolonged period. Thus the bank expects the Reserve Bank’s December 50 points hike to be its last during the current interest rate cycle.

However, the bank adds the caveat: “Unless incoming data confirm a moderation in domestic demand, and movements in oil prices and the rand exchange rate remain relatively favourable, the possibility of an additional hike in February cannot be ruled out.”

Where will the credit end?

Nevertheless, Reserve Bank Governor Tito Mboweni appears mesmerised by the consumer demand for credit. Mortgage lending continues to advance at an unprecedented rate, much of the credit being used to fund goods and services far removed from real estate such as food, clothing, vehicles, clothing and even holidays.

Higher house prices have enabled homeowners to take advantage of higher values by increasing their mortgage amounts. Those homeowners who haven’t climbed on this particular bandwagon can still use their available equity long after house price growth has slowed, or even halted. Most analysts consider that the outlook for the property market depends on households’ ability to continue paying their debt.

As yet banks have reported no sudden upswing in repossessions. But then people generally default on their mortgage bonds last. In spite of the fact that households’ debt-to-income ratio is at a record high it is still containable, averaging less than eight percent of after-tax income on debt servicing. South Africans’ debt repayment to income ratio is still considerably lower than in developed countries with higher proportion of their populations in upper income groups. And the SA ratio will gradually rise as our middle- and upper-income groups expand.

House price plummet unlikely

Standard Bank comments: “Looking at other indicators of households’ financial health may assist in evaluating the current situation. Indeed, there has been a marginal deterioration in some of these indicators, although they remain relatively benign when compared historically. The non-performing proportion of loans, for example, is still relatively low, although it has probably bottomed out… This is the case for mortgage loans but also for credit cards, which usually show signs of distress earlier.

“In a nutshell, then, the absence of a national house price bubble makes a decline in house prices unlikely, bar any shocks and provided that income growth remains solid. The onslaughts on consumer finances, rising interest rates in particular, will continue to limit scope for house price growth.

In the medium- to long-term, house price growth should again be in line with the nominal income growth of between eight percent and 10 percent, but in the short-term there will be limited growth.”

For homeowners used to sky-high house prices, an average nine percent per annum growth means three percent real growth (minus inflation at about six percent).

‘Pockets’ of strong demand remain

Nevertheless, there are pockets of strong demand for residential property. Mick Joyce, Pam Golding Properties’ MD for the Western Cape metro region, reports that the first six months of 2006 saw average growth of 13.9 percent in the region, with 15.7 percent in the metropolitan areas. Gauteng enjoyed 13.7 percent growth and metropolitan Durban 12 percent.

Says Joyce: “We have certainly seen the impact of interest rate hikes on market sentiment, particularly in the investment arena, where returns are sensitive to the cost of servicing debt. But the positive spin-off has been the drop in the number of speculators. What we are seeing now are more savvy buyers who are cautious about overpaying, particularly given the likelihood of further rate hikes. This in turn is resulting in sellers being more realistic about their pricing strategies.”

More realistic prices emerge

In Cape Town’s southern suburbs, area manager Peter Ludwig reports that realistically priced properties are selling within 40 days. Northern suburbs area manager Maureen Nel concurs: “Our sellers are tending to be more realistic about their asking prices and accurately-priced homes are moving fast.”

PGP’s director and area manager for the Atlantic Seaboard and City Bowl, Laurie Wener, says there is plenty of exciting activity at the upper-end of the market above the R8-million mark. She also reports that there has been a cautious but noticeable increase in the level of foreign buyer activity.

Along the western seaboard, area manager Madelon Venter reports a busy market, with show houses being better attended at present than they have over the past 12 months.

Growth stands at a solid 13 percent

In overall terms, according to the latest Rode Report, the year ended with national house prices at some 13 percent nominal growth.

Prices of lower-priced houses have been growing faster than middle- and upper-priced houses since 2004. “This was, of course, the result of the latter categories growing faster in the immediately preceding years which led to increasing unaffordability.”

Residential building activity remained robust and says Rode — all the signs are that medium- to high-density residential developments will keep activity in this market healthy.

Residential building inflation was at 10.3 percent (slightly higher than expected), which, says Rode, “suggests that residential contractors were still growing their profit margins.” However, says the Report, “what is important is that the rate at which contractors are able to stretch their profit margins has been decreasing since 2004.”

Article from: http://iafrica.com