SA house prices falling through the basement

Latest statistics suggest that the property market is set for a moderate decline this year, but people close to the pulse of the industry like estate agents believe there will be further severe falls in house prices and private property developments might be curtailed.

This will be good news for house buyers and property investors towards the end of the year.

The Absa house price indices, released on Friday, show that prices in the middle segment of the market grew by only 4% — the lowest growth rate since 1996. In real terms, house prices dropped by about 7% last year to November, and dropped even further in December.

Absa said that, in view of economic expectations, the 2009 outlook for residential property “remains bleak”. Mid-year should see the bottom of the market, followed by a gradual improvement.

An influence on the residential market will be an expected increase in the number of homes repossessed by lending banks.

Some property analysts expect the “homes repossessed” to almost triple this year to around 150000. These “distressed” sales often are negotiated at up to 40% below the real value of a house.

Ben Pillay, chief executive of the Institute of Estate Agents of SA, said that even if interest rates fall again in February, it could take up to nine months for this to filter through to the residential property market. He added that house prices were “so badly overvalued that they would have to come down dramatically”.

The National Credit Act forced banks to toughen their credit requirements, making loans more difficult to obtain, while repossessions will probably increase, he said.

The institute will restructure itself in the next few months to raise the status of its membership. A similar body, the National Association of Estate Agents, established in 2006, has been dissolved.

Lew Geffen, chief executive of Lew Geffen Sotheby’s, said he expected house prices to decline more sharply than many had forecast. In time, buyers would get bargains.

He cited the example of a house offered for R7-million in February last year that was finally sold for R5.8-million and another, in Cape Town, on offer for R17-million, finally being sold for R12-million.

A number of homes are on the market for rent, but the problem is that with lower house prices, rentals that can be obtained often do not meet the monthly bond repayment.

Earlier this week, the FNB House Price Index revealed that house prices declined in December by 1.7%, in spite of having risen by 5.2% for the full year. FNB Property strategist John Loos said he expected house prices to fall 4.2% this year, after peaking at a 29.5% rise in 2004. He advised sellers not to sell at present.

“It’s not a good time to sell and it’s going to be a while before you can drive a hard bargain as a seller. There will probably still be some over-supplies around for much of the year, with selling due to financial strain and ‘sales in execution’ not expected to decline over- night.”

Another setback for property development has been the 15%-16% price increase announced by Pretoria Portland Cement. This follows an increase of 8.5% in January 2008.

Neil Gopal, chief executive of the SA Property Owners Association (Sapoa), which represents major commercial, industrial and retail property owners, said this would have negative implications for the property industry.

“Another cement price increase will raise the cost of building projects even further in a market already plagued by many other uncertainties.”

Kumarsen Thamburan, chairman of Sapoa’s building development committee, said the price of building materials is placing huge pressure on the market and steel prices seemed to have exacerbated the inflation in construction prices.

Such increases have an adverse impact on construction budgets, with a corresponding negative effect on returns of building projects.

Kevin Penwarden, chief executive of bond provider SA Homeloans, said that whereas in the past two years banks were prepared to provide home loans of more than the total price of the house, to cover items such as transfer fees, they are now “looking totally differently at their books”.

He believes bank repossessions will increase “exponentially” over the next year or so.

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