The number of cash and mortgage transactions converging

| Article by Siphamandla Mkhwanazi - Economist at Standard Bank

Growth in the Standard Bank House Price Index keeps slowing and the median price of a house applied for and financed by Standard Bank was R923 000 in April, up 4.5% year on year and slightly slower than 4.6% growth in March 2017 – revised up from 4.3%.

Month to month HPI contracted by 1.03% in April. With 6.1% year on year CPI inflation in March, real house price growth remains in negative territory.

Sub-indices show that inflation of freestanding properties continued to slow, while that of flats and townhouses picked up marginally April. The median price of a freestanding house was R1 million, up only 2.8% year on year, slower than 3.7% year on year growth in March.

The median price of flats and townhouses was R820 000 in April, 7.3% higher than in April 2016, and slightly above growth of 7.2% year on year in March 2017.”

Household credit ticked up slightly in March. However, such growth levels continue to indicate subdued appetite by banks to lend to households because of their poor affordability. Household credit recorded nominal growth of 0.6% year on year in March, marginally higher than the 0.4% year on year in February. Likewise, mortgage advances ticked up marginally, recording 3.0% year on year, from 2.8% year on year in February. In real terms growth in household credit remained in contraction – -5.5% year on year – indicating very tight domestic credit conditions.

From a housing supply perspective, monthly residential building statistics still show subdued building activity. The volume of residential building plans approved by larger municipalities contracted by 430 units. The decline was common across all property segments. The volume of residential units completed declined by 370, with freestanding units as well as flats and townhouses under pressure. In value terms, building plans approved – an indicator of future supply – amounted to R4.2bn (constant 2015 prices, seasonally adjusted), a decline of 8.5% compared to the same period last year. Value of residential houses constructed was R3bn, 14.8% higher than the same period last year.

The number of cash and mortgage transactions is converging. Data from the Deeds Office suggests that the share of cash transactions increased significantly from around 20% in 2006/07, before the global financial crisis, to around 40% in 2009 (post-GFC); and then fell to around 36% by the third quarter of 2011 before rising again. By the fourth quarter of 2016, we estimate that cash transactions had risen to 46% of residential property transactions, their highest proportion since the third quarter of 2002.

The sharp increase in the share of cash purchases in 2008 and 2009 was a function of mortgage transactions declining sharply, rather than the amount of cash transactions increasing. Likewise, mortgage transactions have fallen faster than cash transactions between the fourth quarter 2015 and the fourth quarter 2016, with mortgage transactions declining by 24.5% versus a 20% decline in cash transactions in the same period.

This reflects the impact of adverse labour market conditions and the tightening of credit conditions, which limits the number of people able to buy with a mortgage, while fewer such constraints apply to cash buyers. This situation is very similar to that during the financial crisis.

Looking ahead, the SARB’s leading indicator came in at 6.4% year on year, predicting a more buoyant growth in the months ahead. Notwithstanding, SBR expects that the heightened uncertainty due to political risk will negatively affect confidence, leading to continued contraction in investment and job creation, and lower GDP growth.

In addition to lower growth, higher borrowing costs associated with sub-investment grade may result in tax increases, which seemed on the cards even before the downgrade. The consequent deterioration in disposable income growth should affect the potential for a more meaningful recovery in the household credit cycle, which would delay recovery in buying activity.

We note that the number of property transactions in the fourth quarter of 2016 was at its lowest level since the first quarter of 2010, and remains significantly (48%) below its peak of the first quarter of 2007.

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