How low will it go?

The residential housing market is facing a countrywide drop-off in sales volumes of about 35 percent while average house prices have fallen by approximately 10 percent year-on-year (albeit not in all areas). How long will this continue? Three heavyweights from the Rawson Property Group weigh in on this contentious issue...

Tony Clarke, MD Rawson Property Group

Discussing this matter recently, Tony Clarke, MD of the Rawson Property Group, said that Tito Mboweni’s latest statement indicates that South African consumers are now reacting as intended to the hikes in the interest rates and are at last cutting back on spending. A further 0.5 percent hike in August is, however, likely although it could well be the last one we see.

“If that reading of Mboweni’s statement is correct,” said Clarke, “it means that the long-awaited decline in the interest rates should start in the first quarter of 2010 (because there is usually a fairly long period with a stable interest rate after the increases have peaked) and, once that happens, confidence in residential property will return, as it always does when consumers no longer fear rate rises.”

Clarke said that several factors lend credence to this expectation. There has, he said, recently been an improvement in the trade deficit and there are now definite signs that inflation — with the CPIX peaking at 11 percent — will stabilise by the end of this year. By then a solution to the Zimbabwe situation could be on the way.

“The Rawson analysts are, therefore, now looking for a levelling off by the end of this year and a slow but steady upturn towards the end of 2009, with the market strong again by 2010. Unless further unforeseen factors crop up, I see that as a realistic assessment of how the market will perform.

"As we have said before, now is an excellent time to buy because good property deals are available throughout South Africa."

Bill Rawson, Chairman of Rawson Properties

Bill Rawson, the Chairman of Rawson Properties, said this week that the much discussed low point in house sales and house prices could now be far closer than most people realise.

Analysing the Residential Property Price Ranger's (RPPR) latest figures for the Cape Peninsula, Rawson said that these show that, despite much negative comment from the public and media, prices have held up remarkably well.

“The average house price in the Cape Peninsula from March 2008 to June 2008,” he said, “was R1.99-million. While this was well down on the R2.56-million average for the same period in 2006, it was significantly up on the R1.69-million average for 2007 and also up on the 2005 average of R1.89-million. These figures are not discouraging.”

Why then does Rawson suspect that the low point (which could also be the turning point before better times begin) could be approaching?

“If we look at the RPPR unit sales,” said Rawson, “these show that the numbers sold could now have hit rock bottom — only 404 homes in the Cape Peninsula were sold in June 2008. This is less than half the 1106 units sold in June 1998, when interest rates were at 20 percent and many were saying that the market could hardly be worse.”

Unit sales for the last month, added Rawson, were down by 60 percent on the same period last year — another indicator that we could be nearing the bottom of the graph.

“We are now very definitely in a new economic territory,” said Rawson. “This, I believe, is because we are now more part of the global scene which previously did not affect South Africa so closely. In 36 years of property dealing I have never seen quite such massive fall-offs in unit sales. The consumers, many of whom are newly empowered and possibly over committed, are struggling as never before to pay their way because of rapidly rising food, fuel and other prices, all of which have hit record highs.”

In the circumstances, said Rawson, the economy, already 'more or less killed off', in his view very definitely does not need a further brake put upon on it through another interest rate hike.

He repeated, however, that now is the time to buy because unit sales are highly unlikely to go much lower than their current level and once they begin improving house prices will respond.

“Either way, if you need to sell or buy, stay in the market as it would be a real gamble and very unwise to sell and then wait for prices to fall further before buying again.”

Rob Lawrence, Business Development Manager of Rawson Properties

The current slowdown in the property market is part of a normal economic cycle and a global trend. Anyone who has charted the rises and falls in property prices over the last 40 years will have learned two lessons, says Rob Lawrence, Business Development Manager of Rawson Properties:

The 'Elliot Wave' effect is clearly discernible — every downturn is followed by an upswing in which the nett capital gains are higher than those of any previous cycle.

The housing market begins to show positive growth as soon as interest rates stabilise. The level at which they stabilise, he said, is not all that important. What buyers are looking for is stability — before they commit to a home purchase they want to know that the interest rates will not rise further or that they can fix them.
“In the current SA market,” said Lawrence, “it is disturbing to learn from Investec that Statistics SA (on whose figures the SA Reserve Bank base their interest rate policies) have again miscalculated the inflation rate by some two percent. However, this could turn out to be good news for the prospective buyer or seller of residential property, because economists have been predicting another increase in interest rates on home loans over the next two quarters. If Investec is correct, the Reserve Bank might well hold back on further interest rate increases. This would be good news for the property market, as it would bring the long awaited rate stability.”

Illustrating just how much higher interest rates impact on the house buyer Lawrence said that at a 13 percent rate a typical buyer with an affordability surplus of R10 000 per month can afford a R900 000 bond. At 15.5 percent that same buyer can only afford a R780 000 bond.

“Not surprisingly,” he said, “we are now seeing many people who previously would have bought a home opting to sit out the current period as tenants renting a home while they wait for further adjustment in house prices and the interest rate.”

This wait, he said, could soon be over because, assuming Investec’s inflation figures to be correct, the stabilisation in interest rates may not be too far away.

“A Financial Mail survey has shown that the average price of a home in the Western Cape has dropped from an early 2007 high of R1.13-million to R815 000 at present. There are now clear indications that significant further price drops are unlikely even if we do have another small interest rate rise. This means that the next half year is almost certainly the right time to buy a house. Prices are now really attractive, especially in view of the fact that interest rates might be stabilising and could possibly fall in the second half of 2009.”

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