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Property market: dark days indeed

Falling interest rates won't stop prices from dropping or ignite sales volumes - new property data, scary home loan rejection rates.

Falling interest rates won't stop property prices dropping or ignite sales volumes. The lack of credit available in the market is keeping a lid on South Africa's residential real estate market and this time we need a marked improvement in economic growth and a drop-off in unemployment figures before banks start lending again.

That's the message from Jacques du Toit, senior property analyst with Absa Home Loans, when he delivered a fresh set of bleak property data to South Africa on Wednesday.

Absa's house price index, which has been tracking residential values for decades, shows the average nominal price of a middle-segment house dropping by 0.4% year-on-year in March. That's a bigger fall than the 0.2% year-on-year figure for February.

The average house price is now about R961 800.

Property prices: clock turns back to 2007

Absa's property index details show that your house is now, in effect, worth what it was in November 2007, which was just before South Africans got depressed about the political rise of president-in-waiting Jacob Zuma and widespread electricity shortages.

Like other economists, Du Toit expects the SA Reserve Bank's Monetary Policy Committee to chop the repo rate by about another 2,5%, taking interest rates down to where they were in mid-2006 - the 10,5% they were at before the market started slipping into decline.

Although this means the interest rate will have been cut dramatically, freeing up hundreds and even thousands of rands for indebted consumers, the chops are unlikely to make much of a difference to the property sector in the shorter term.

Du Toit said it takes about six to nine months for each interest rate cut to work its way through the economy.

Plus, this time around, South Africans also have to contend with severe global and domestic economic woes.

Du Toit told Realestateweb - Moneyweb's (JSE:MNY) property website - that there has been some recent sideways movement in the house price index but the bank expects further price declines this year.

"It is so difficult to find some positive news anywhere in the economy. The property market is really under pressure. It is not a bad time to buy because prices are under pressure," he said.

Home loan credit: a scarce commodity

Bank managers have dramatically tightened up credit criteria and it is now generally expected that buyers put down deposits of 20-30% of a property's price in order to secure mortgage finance.

Du Toit said it is unlikely banks will ease up on these stringent criteria any time soon.

He said banks are waiting for the broader economic conditions to improve and are particularly concerned about job losses. They would also like to see a stabilisation and slight pick up in property prices too.

Also released on Wednesday were mortgage originator ooba's house price figures, which suggested a more dramatic decline of 4.2% year-on-year.

"The March oobarometer continues to reflect the downward pressure on house prices and we expect continued pressure before some slight recovery toward the end of the year," said Saul Geffen, chief executive of ooba (formerly MortgageSA).

The average purchase price was R810 156 in March 2008 compared to R775 559 in March this year, according to ooba's calculations.

The originator noted that the figures reflect a significant reduction in the year-on-year and month-on-month average approved bond size thanks to the banks' higher deposit requirements.

The average bond size recorded in March 2009 was R596 903, a 12.4% drop from the average bond size of R681 761 in March 2008 and a 4.8% drop in the month-on-month average bond size from R627 302 in February this year, it said.

The year-on-year average deposit continues to record significant increases as a result of banks lending policies. The average deposit as percentage of purchase price required is up 45.5%; from an average of 15.8% required in March 2008 to 23% required last month, said ooba.

"The average bank decline ratio has again shown a substantial annual increase, bringing average decline ratios up to 58% in March 2009 from 43% a year earlier."

Property deals few and far between

Property buyers are being turned away from banks in their droves. A potential buyer, it seems, is more likely to have a loan application rejected than accepted.

According to ooba: "The ratio of applications declined by one lender but approved elsewhere also continues to show significant annual decreases with now only 21% of applicants declined by one lender being approved by others."

It said the overall bank approval rate (after taking into account the ratio of applications declined by one lender but approved by another) has slipped from just over 80% in May 2007, to under 55% by March 2009. For the same period, deposits have increased from 10% to over 20%. Taking into account that property sales are down nearly 50%, the value of new home loans being granted are down over 85% since May 2007.

Geffen said that, with close to a 60% rejection rate, demand is not being supported and downward pressure on property prices remains.

Last week, Standard Bank and FNB also issued house price reports that show residential values falling. FNB's House Price Index for March reflected South Africa's house prices down by about 8% compared to the same time last year. Standard Bank's Residential house price report showed a more modest decline of about 1,5%, however the bank emphasised the data was skewed for various reasons, including a drop in middle- and lower-priced properties being processed.

Full oobarometer analysis:

Indicator
March 2009
March 2008
Change yr on yr
(Mar 09 vs Mar 08)
February 2009
Change month on month
(Mar 09 to Feb 09)
Avg purchase price    775,559 810,156 -4.2% 827,553 -6.2%
Avg purchase price of  first time buyer 545,185 564,152 -3.3% 555,080 -1.7%
Avg approved bond size 596,903 681,761 -12.4% 627,305 -4.8%
Avg deposit (as % of purchase price)   23.0% (R178,656) 15.8% (128,395) 45.5% 24.1% (R200,248) -4.5%
Avg age of applicant 37 38   1 Year Younger   37 No Change
Avg decline ratio       57.9% 43.8% 14.1%  Increase 57.5%* 0.4% Increase