Weak rand unlikely to lure foreign property buyers - FNB

The substantial depreciation in the value of the rand against foreign currencies, which has made South African residential property significantly cheaper for aspirant foreign home owners, is unlikely to attract a higher number of foreign buyers into the market, according to FNB.

John Loos, a household and property sector strategist at the bank, said yesterday that the FNB house price index declined last month by 6.9 percent in dollar terms, 8.4 percent in euro terms and 3.4 percent in pound terms.

Loos doubted the significantly cheaper residential property prices for aspirant foreign owners would attract a higher number of foreign buyers into the market because it seemed the cheaper domestic house prices resulted from a deterioration of investor sentiment.

The latest FNB house price index revealed that the acceleration in nominal house price growth, which picked up early this year after a lull late last year, continued last month. The average house price grew by 5.8 percent year on year in May, compared with the revised growth of 5.4 percent in April.

The average value of homes sold in the index last month was R885 773.

However, real house prices, after adjusting for general inflation in the economy using the consumer price index, continued to show a slight year-onyear decline of 0.4 percent.

Evaluating the medium-term performance of the FNB house price index, Loos said the index in real terms was 19.2 percent lower than last decade's real price peak, which was reached in November 2007. In nominal terms it was a mere 14.9 percent higher.

But compared with May 2003, the index was 49.8 percent higher in real terms and 151.9 percent higher in nominal terms, which suggested that the price effects of the residential demand boom in the past decade had "far from worn off despite a significant downward real correction since late 2007".

Loos said despite the recent improvement, the outlook for the housing market was mediocre because of very disappointing gross domestic product growth in the first quarter, while slowing estimated total employee remuneration growth pointed to an economy under pressure.

This suggested a further slowdown in disposable income growth early this year, which probably largely explained the recent steady deterioration in consumer confidence, he said.

He said the other key event related to residential property demand last month was the Reserve Bank's decision to leave interest rates unchanged, thereby offering no additional demand stimulus.

"The combined impact of no interest rate cutting of late and slowing wage bill growth could have negative implications [for] growth in residential demand in the near term," he said.

It was questionable whether residential demand strengthening could continue at a time of such economic weakness, when there had as a result already been a steady slowing in growth in real consumer demand.

"A still slow rate of growth in residential buildings completed keeps supply growing at a slow pace," he said.

"But a weak economy and resultant weakened disposable income growth leads to the ongoing expectation that house price growth will continue to remain largely in single-digit territory in the near term, not far outpacing consumer price inflation of near to 6 percent."

Business Report

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