Boom without the bust?

House prices are not about to enter a boom-bust scenario, but are rather going to stabilise at their current high levels, Standard Bank economist Elna Moolman said at the release of the bank’s quarterly property report.

That must be comforting to recent buyers of homes, especially since, on the face of it, the numbers suggest that the South African homeowner must be feeling the squeeze.

“In the medium to long term, house price growth should again be in line with (consumers’) nominal income growth of about ten percent, but in the short term there will be limited, if any, growth in house prices,” the report said.

2007 a soft year?

This tallies with FNB economist John Loos’s forecast last week that house prices would pick up heading towards the 2010 World Cup, though 2007 might be a soft year for residential property.

Not only have house prices become less affordable by continuing to rise far faster than most people’s incomes — by a nominal 300 percent or so between 1997 and the start of this year — but petrol prices have risen by more than a fourth in a year, up 28.1 percent last month (year-on-year), according to Standard Bank, and are approaching R7 a litre. Food prices had also risen by seven percent year-on-year in May.

The bank said inflation — the rate at which prices generally increase — was at around four percent year-on-year this May but was likely to rise to 6.3 percent by the first quarter of next year.

A nation of homeowners

These numbers are worrying because of the likelihood of further interest rate hikes, and South Africa is, according to data contained in the property gauge, a nation of homeowners rather than renters — with a home ownership rate of 77 percent, surpassed only by Italy and Spain.

The report states that household debt has risen, thanks to rising house prices. “This is not only because of households’ growing debt exposure through new purchases, but (house prices) have also allowed existing homeowners to cash in on higher values by increasing their outstanding mortgage amounts in line with higher valuations.”

The good news for the nation is that the amount that South Africans pay on servicing household debt, compared with how much they earn, is still below the crisis levels seen in the early ’80s and during the emerging-market meltdown and ensuing interest rate crisis in 1998.

The graph shows that the level of debt repayment to income is not as high as it was during 1998.

Household debt

However, South Africa’s ratio of household debt to income has started to reach levels seen in developed countries — it is currently a little more than seven percent, which is just behind Canada and not far from the UK’s level of slightly more than eight percent

. Standard Bank group economist Goolam Ballim said the housing market was the most sensitive segment relating to credit and the economy.

“We are entering a tightening rate cycle, which is bound to have an effect on housing,” he said.

Moolman said that “the five-month rolling trend suggests to us that perhaps house price growth may slow more than we expected”.

She said this was because of rising expenses such as petrol and the fact that inflation was also rising — “so consumers’ real income won’t grow as fast as it did before — and all this is happening when households have the lowest level of savings ever, so they have no buffer to protect them from shocks.”

And rates are rising, she said, adding that Standard Bank expected the Reserve Bank to raise rates by 0.5 percentage points at each of the next two meetings. She warned that since affordability of housing was worsening, “the responsible consumer should start to slow down debt accumulation” and not chase rising house prices.

Unsurprisingly, with prices having risen so much, investors in the buy-to-let market cannot cover as big a proportion of their mortgage instalments as before from rentals.

Moolman said: “Fewer investors entered the housing market in 2005 and this is expected to decline further in 2006.”

A crash is not impossible…

She said that while it was not impossible that there would be a crash in the housing market, “our central scenario is that house price growth will be positive”, so at least house prices shouldn’t lose value.

Ballim said that with economic growth robust, rates would have to rise by much more than the expected one or 1.5 percentage points before South African homeowners reached the stress levels of 1998.

He described that probability as “very low”.

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