Residential property report House prices: no bottom yet

What is the latest? Standard Bank’s property book for the first seven months of 2009 showed an average monthly decline of 3.8% in the median house price. The trend cycle of the July data confirmed that median house prices are still declining and that the weakness in the property market is set to continue. The July smoothed data yielded a rate of contraction of -4.9% compared to a year ago – the same as in June. In real terms, using our estimate of the CPI in July to deflate the nominal house price, the decline in real house prices comes to approximately 11.7%. The smoothed growth rate for July shows that the value of the median residential properties financed by Standard Bank was R540 000. The overall growth in the economy, the level of household income and debt, as well as the medium-term economic and financial outlook, are such that a clear and immediate improvement in the housing market is unlikely. The best that we can hope for is for price declines to stabilise towards the end of the year as the recent interest rate cuts work their way through the economy and overall sentiment improves.

The macroeconomic backdrop remains clouded. The World Bank is predicting that the global economy will contract by 2.9% in 2009, placing further strain on the South African economic outlook. The overall consensus seems to suggest that at best only the second half of next year may see a meaningful improvement in global conditions.

Domestically, conditions worsened further in the first quarter of the year, with the slump in GDP growth reaching -6.4% (q/q s.a.a.), the worst since 1984. Furthermore, the contraction was broad-based among the sectors, suggesting that the economic recovery will be slow and difficult. Preliminary evidence from economic indicators points to a poor start to Q2 GDP. The weak economy will be reflected in a poorly performing labour market. According to Statistics South Africa’s (Stats SA) Quarterly Labour Force Survey employment fell by 2% between Q1 2009 and Q2 2009. This translates into 267 000 jobs in both the formal and informal sectors. In Q1 2009 208 000 jobs were lost. Furthermore, economic growth is expected to contract by between 1% and 2% in 2009 from growth of 3.1% in 2008. The employment crisis is likely to be prolonged in the current economic downturn. With employment a fundamental driver of the housing market, the housing market will remain under pressure.

The latest national accounts data confirm that the slowdown in the economy has been spearheaded by a substantial decline in household consumption expenditure. A decline of 4.9% in real household consumption expenditure was reported for Q1 2009. Consumers’ cut back in spending should be viewed against the backdrop of a steep decline in real personal disposable income of households of 4.5% in the quarter. Without a doubt, the contraction in real disposable income growth was the result of a sharp decline in bonus payments, operating hours, job layoffs and lower property income – a trend that is likely to endure for at least another six months. Moreover, the household debt-to-disposable income ratio rose marginally to 76.7% from 76.3% in the last quarter of 2008, implying that financial strain on households remained elevated in the quarter. Household savings as a ratio of disposable income increased slightly in Q1, but remains in negative territory. However, consolidation of debt should gain traction during the second half of the year, when the debt service cost-to-income ratio is expected to fall to around 8% from its current level of 10.9%, while lower inflation will further free up some cash. Whereas consumer confidence edged up slightly to 4 index points in Q2 from 1 in Q1, the rating of the appropriate time to buy durable goods declined further to -21 in Q2 from -11 in Q1. Consumers are apparently becoming financially more conservative, which suggests that they are more inclined to reduce debt and build precautionary savings. Under these circumstances, the platform for establishing stability in house prices will continue to be weak.

Supply of residential housing lagging. On the supply side of the housing market the value of recorded residential building plans passed by large municipalities (at current prices) during January to May 2009 decreased by 44% compared to the same period in 2008. The value of residential buildings reported as completed during January to May 2009 increased by 8.2% compared to the same period last year. This will further weigh on house price growth as excess supply given weak economic demand will erode pricing power in the industry.

What are the risks to the property market? It cannot be expected that the housing market will flourish when the economy is under such strain as it is currently. As noted earlier, the outlook for the economy over the short term remains bleak. Statistics are still reflecting a rising number of insolvencies and liquidations and banks have reported significant increases in bad debt. Households currently owe banks an astounding R1.2 trillion, of which the greater part (70%) represents mortgage advances. Furthermore, about a third of South Africans with impaired credit records are more than three months in arrears. With house prices still declining, the wealth base of households is compromised, putting further strain on households. This will make for a mild recovery in the property market, which is unlikely to gather any traction this year. On the monetary policy front it appears that downward phase of the interest rate cycle has come to an end. The cumulative 450 basis points cuts that commenced in December 2008, however, will still have to filter through the economy. The full impact of interest rate cuts on economic growth could take as long as 12 to 18 months. Further sharp increases of the order of 31% in electricity tariffs and possibly in the price of oil are in the pipeline over the next few years. This will put upward pressure on inflation and interest rates.

Outlook: Smoothed growth in the Standard Bank median house price index decreased by 4.9% y/y in July, averaging 3.8% y/y in the first seven months of the year. Over the short term, the economic outlook is expected not to improve much; however, relatively positive developments on the inflation front and the full impact of lower interest rates will in due course support the property market. It is anticipated that house price growth will be negative over the short- and medium term, but likely to bottom out towards the end of the year as the effect of interest rate cuts filter through the economy and the property market.

Johan Botha, Standard Bank

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