Recovery or Reduced Rate of Decline?

Private Property South Africa
Antoinette McDonald & Angelique Arde

The residential property market in South Africa has bottomed out and is said to be on the path to recovery. That’s going to be a hotly contested statement, no matter who makes it. The fact of the matter is nobody is making it as explicitly, but estate agents say, rather intangibly, that the market is improving.

How you view that will depend on whether you are a “glass half full” or “glass half empty” sort of person. We asked some experts what they thought.

FNB property expert John Loos says agents are talking about a “very mild up-tick” in demand for residential property. But, Loos qualifies this.

His FNB House Price Index continued to decline in July. “But there is some hint that the rate of decline may be starting to diminish.” This doesn’t mean a national price increase. It just means that on a year-on-year basis, the index declined by -9.5%, slightly less extreme that the revised -9.7% rate of decline in June. This follows a period of continuously declining price inflation which goes back to the beginning of 2008.

Loos says agents surveyed by the bank still point to a “big oversupply” of property on the market. “With prices being the result of interaction between demand and supply, it probably stands to reason that despite demand picking up mildly, the oversupply needs to be mopped up before national price inflation can resume. I think we’ll have to wait until some time next year before this happens.”

Loos says it is important to understand that when agents talk of a bottoming out in the cycle, it probably refers more to demand and not necessarily a bottoming out in prices yet. Within the property market, developers, he predicts, will probably have to wait the longest for things to get better. Loos says data shows that the top 10% priced metro suburbs in South Africa seem to have taken the recessionary knock first and may have reached stability now. The affordable segment lags the cycle and probably has the most pain to endure yet.
Loos says that key to understanding the market is the potential of buyers to service debt.

The debt service ratio (the cost of servicing household debt as a percentage of disposable income) has been declining due to the SA Reserve Bank interest rate cuts.
“But this is not due to any significant reduction in the debt-to-disposable income ratio (DDI ratio). The DDO ratio remains near historic highs.” This is because disposable income growth is less than household credit growth.

“So given the high indebtedness levels along with real disposable income decline, the household sector cannot respond more than very mildly to interest rate cuts, and this mild response is probably being seen on the residential demand side recently.”

Loos says for this to change, our economy would have to grow again at 4-5% per annum.

Will this happen?

“I’m afraid I don’t think any time soon. If you think our household sector’s debt ratio looks bad, try the US. I think they’ve got a few years left of sorting out their troubles before they start growing. A 1-2% positive economic growth is perhaps more realistic to expect in 2010, the stabilization being the result of the end of a great global inventory run-down, after which manufacturing orders start to pick up a bit.”

So Loos says there are recoveries and recoveries.

“This one looks set to be a very weak one, driven almost solely by rate cuts (no economic growth to speak of right now and only mild growth later), where house price inflation may resume in 2010 but at a very moderate pace of somewhere between 0-5%.”

We bounced the theory off property economist Erwin Rode.

He says he’s pessimistic about the property market and he’s not expecting a recovery any time soon.

Rode says one must differentiate between price movement and number of transactions, and between the worst of the crisis being over and what’s happening in the medium term.

“I’m not optimistic about house prices. I won’t be surprised if # prices continue to decline until the end of this year. This recession is more serious than the optimists would have us believe. The driver, of course, is the US economy. For far too long now Americans have lived beyond their means and now the time of reckoning has come. I think we’re facing a long period of low growth.

“Our economy is facing serious fiscal problems. It’s not clear to me where the government is going to save. I’m pessimistic about income tax and the cost of electricity and petrol. All in all, I don’t expect inflation to fall through the floor. It might drop to five percent. And before the market recovers, we can expect a few false starts.

“Income after tax will be under pressure for long time to come; and house prices will remain high.”

So there you have it Pollyanna. Those rose-tinted glasses can only do so much.

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