Property's sky is falling

South African residential property put in its worst performance in 12 years, the Standard Bank said on Tuesday as it released its median house price index.

The index recorded a decrease of 3.1 percent year-on-year in December, bringing the average annual decline in 2008 to 0.3 percent, the bank said.

According to Standard Bank, the second half of 2008 showed large swathes of the economy under huge pressure — "economic growth virtually came to a standstill in the third quarter of the year; consumers who had overextended themselves during the good times came under severe financial stress; and the residential property market had its worst performance in 12 years," Standard Bank said.

Furthermore, the international economic environment was in tatters with the industrialised world experiencing its worst recession in almost 80 years, the bank added.

In the early part of 2008 households and businesses suffered from high oil prices, threatening to result in runaway inflation, only for commodity prices to collapse on a grand scale towards the end of the year.

The combination of sharply declining commodity prices and weak demand resulted in inflation falling rapidly in many countries, the bank said.

"Locally the decline was less spectacular, but with inflation peaking in August last year and the outlook for further declines rosy, room was created for the Reserve Bank to cut the repo rate by 50 basis points in December."

Standard Banks said job layoffs were on the increase as businesses found it increasingly difficult to cope given the trying economic and financial circumstances.

"These conditions point toward further strain for the housing market in 2009."

The weakness in the economy was reflected in disposable (after tax) income which advanced by only 0.2 percent in the third quarter of 2008 compared to growth rates of higher than 6.5 percent in 2006 and 2007.

Household savings as a percentage of disposable income had been negative since the beginning of 2006, the bank said.

Furthermore, household debt remained a sizeable burden despite easing since the second quarter last year.

"Clearly, the combination of slow growth, relatively high interest rates, punitive debt levels and still high inflation in a general environment of plunging confidence will impact negatively on many segments of the economy, including the residential property market," the bank noted.

According to Standard Bank, the housing market could not prosper in a weak economy which was still reflecting a rising number of insolvencies and liquidations.

Banks had also reported sizeable increases in bad debt, it said and households currently owed banks an astounding R1.1-trillion of which the bulk constituted mortgage advances.

Over the short term economic conditions were expected to deteriorate further, however, positive developments on the inflation front early this year would lead to further interest rate cuts in 2009, the bank said.

"Standard Bank expects 250 basis points relief this year."

Article from: www.iafrica.com