Home prices falling again

According to the FNB House Price Index, year-on-year price increases are slowing again after a brief respite earlier in 2010. In the third quarter the average house price increased by seven percent on a year-on-year basis, down from 11.3 percent in the previous quarter. The picture was slightly better than the national average in the Full Title Market, with the Full Title Index recording third quarter year-on-year increases of 8.7 percent. However, the overall index was dragged down somewhat by the Sectional Title Market, with the Sectional Title Index increasing by a slower 3.9 percent.

On a quarter-on-quarter basis, the overall average house price index declined by -1.5 percent. The FNB House Price Index is not seasonally adjusted so one must be cautious with month-on-month interpretations, but other statistics suggest that there is reason to believe that this price slowdown is more than just seasonal.

The FNB Valuers’ Market Strength Index has remained negative all through the mini-recovery of 2009/early-2010, which suggests weak demand relative to supply. Recently, this index has started to deteriorate further, with the valuers rating supply stronger in recent times while also perceiving demand to be weakening. In the third quarter of 2010, the Market Strength Index recorded a level of -0.171, which is a slight weakening on the previous quarter’s 0.167.

The sample of estate agents surveyed in the FNB Estate Agent Survey effectively also point to an unbalanced market or, otherwise put, an unrealistically priced market, with the average time that a property is on the market prior to sale being estimated at a lengthy 15 weeks and four days. This would appear too long for the market to be deemed as a strong one, suggesting that asking prices are still too high given the weak level of residential demand. In the healthier times of 2005 and 2006, the average time on the market was generally below two months.

Considering the above factors, along with a host of economic factors, we retain the expectation of average price decline for 2011 as a whole, after an expected 6.4 percent increase in the 2010 average price over 2009’s average price.

When the market is unbalanced in favour of supply either demand has to catch up, supply has to drop or prices have to fall. Indications are that supply of existing property is strong with high levels of financial stress-related selling. Indications are also that residential demand is currently weakening. That leaves a price decline as seemingly the logical outcome.

We believe that the following factors have restricted the level of demand even throughout the 2009/early-2010 "mini-recovery":

  • A very high level of household sector debt-to-disposable income ratio which remains high despite some decline from the early-2008 peak level. The SARB put the second quarter debt-to-disposable income ratio at 78.2 percent for the second quarter; only marginally down from the 82 percent peak early in 2008.
  • SA’s low savings rate, which affects the household sector’s ability to afford the deposit requirements that have been re-instituted by banks in recent years. The SARB estimates net dis-saving at a poor -0.2 percent of household disposable income.
  • The need for the slow process of rebuilding financial "buffers" after the recession.
  • The urgent need to address certain fixed investment and important consumption expenditure backlogs, built up in the recession period, which can further delay the recovery in residential demand to satisfactory levels. Home maintenance and vehicle replacement are a possible two such expenditure items.
  • Ongoing mediocrity in the rental market, translating into mediocre average residential yields, which makes the investment buying of property unattractive for many. In addition, this era of low capital growth relative to interest rates contains speculative demand.

We believe that the following factors have led to a slowing in residential demand from the already mediocre levels of the early-2010 "minipeak":

  • Signs of slowing global, and thus local, economic growth which in turn negatively impacts upon household sector real disposable income growth.
  • A lack of interest rate stimulus since August 2009, which means that the positive impact of the more aggressive part of the rate cutting cycle up until August 2009 is probably starting to wear thin.

Finally, the traditional housing affordability ratios don’t indicate a major problem with housing affordability levels per se. Price/average employee remuneration and mortgage installment/average employee remuneration ratio appear to be back around 2004 levels, reflecting a few years of improvement in affordability. However, these affordability measures don’t tell the full story as job loss has meant that there are less average wage earners around compared with a few years ago. So, much of the pressure on the residential market comes more from other non-property (though sometimes related to property) expenditure items that suppress residential demand, along with weak economic and household income growth for the household sector as a whole.

Article by: John Loos and Ewald Kellerman - www.iafrica.com