2014 Through A Crystal Ball

Private Property South Africa
Lea Jacobs

Generally speaking, 2013 was a pretty good year for housing markets across the globe. The British property market saw rapidly rising prices in London while other areas saw stable growth. According to a report in The Telegraph house prices in that country rose at a pace not seen since the economic crisis and the average price for a property in the UK now stands at £174 910, up 7.7% from November last year.

Things have also been improving on the South African property front. By all accounts, banks relaxed their purse strings a little more last year and house prices have been rising, if not dramatically, then at least steadily.

“In order to look forward into 2014, it is probably necessary to consider some of the economic trends through 2013 as the year progressed,” says John Loos, the Household and Property Sector Strategist for FNB. “This leads us to believe that we should not expect to see a large increase in the average rate of house price inflation on that of 2013. The reality is that South Africa has anaemic economic growth at best, with the 2013 average real economic growth rate looking set to come in at near to two percent. Such a rate would mean the second consecutive year of slowdown in economic growth since a more respectable 3.5% rate was achieved in 2011.

“Slowing economic growth, in turn, is influential in slowing the pace of employment, wage growth and thus household disposable income growth. So, whereas real household disposable income growth peaked at an impressive 5.2% in 2011, it looks set to be nearer to 2.7% for 2013 when we receive the data for the final quarter.”

A weaker Rand continues to add to South African consumer woes. The price of petrol increased by 39 cents on the first day of this year and is likely to rise even further in the coming months. This, coupled with rising food costs, is going to force South Africans to dig yet deeper into their rapidly emptying pockets and affect disposable income even further.

Loos says that slowing real disposable income growth has already taken its toll on consumer confidence, with the FNB/BER Consumer Confidence Index showing negative readings for six out of the last seven quarters.

“We thus enter 2014 still on a broadly slowing economic real disposable income growth path since 2011, a path which has already had a negative impact on overall growth in consumer expenditure. We also enter the new year not forecasting any interest rate cutting, and thus no further stimulus from the SARB either, as consumer inflation continues to move around the higher part of the three to six percent target range.”

It's not all bad news however and Loos says that while a slow economy and lack of interest rate cuts could be expected to have a moderating influence the pace of growth in residential demand in 2014, there are two other key factors which can possibly have the opposite influence.

“Firstly, the question needs to be asked if banks as a group are beginning to see mortgage lending as a potential source of asset growth after the unsecured credit boom has all but ended. Why not? “Recency bias” in humans suggests that long periods of low and stable interest rates, and better times in recent years regarding bad debts on mortgage books, can often be expected to drive a perception of lower risk amongst lenders and borrowers alike. This could imply relaxations in lending criteria, something which may have been taking place already, and which in turn could be boosting residential demand.

“What we do know at least is that the National Credit Regulator data has pointed to accelerating growth in mortgage lending in recent quarters, as well as cutbacks in other forms of credit granted. So, whereas total household credit granted in the third quarter of 2013 grew by a moderate 6.8% year-on-year, the mortgage component of that grew by a very strong 20% in value, and has been on a sharply accelerating growth trend in recent quarters.

The second key factor is the supply side of residential property. It appears that the construction industry is still recovering from the economic fallout of 2008 and the recorded number of residential units completed for the first 10 months of 2013 rose year-on-year by a mere 3.2%. At this stage the level of building activity remains not far above half of what it reached at the height of the residential building boom back in 2007.

“The result of the slow recovery in building activity to date is that, not only do we enter 2014 with residential demand still rising, but supply has also been becoming more constrained according to FNB’s valuers. When one shows the demand and supply ratings on a monthly basis, we see the gap steadily closing between the two, and at 48.73 by December, the Market Strength Index is getting very close to the crucial 50 level. This level is the best Market Strength Index level since October 2008.

“In line with an improving demand-supply balance, we also approach 2014 with accelerating house price growth when viewed on a monthly basis. So, whereas the average price growth for the entire year of 2013 was slower than that of 2012, this is due to growth earlier in 2013 being slower, whereas in the latter parts it was once again picking up speed, reaching 8.7 percent year-on-year in December.”

Loos states that the net result of all of the above is that, despite a slowed economy in 2013, other factors, most notably some possibly more relaxed lending by banks as a group, and a constrained supply side of the residential property sector, lead us to lift our 2014 average house price growth forecast to nine percent thus up from 2013’s growth. In 2015, however, we would expect price growth to once again slow, based on our forecast that interest rates could start to rise in 2015.

He says that the residential market of 2013 could be described as a “comfortable and well-balanced market”, which was still largely free of extreme or “crazy” behaviour, and certainly not booming. “Despite a weak economy that looks likely to persist, supply constraints could cause 2014 house price performance to be slightly better in our view.”

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