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SARB indicator bodes ill for property
The South African Reserve Bank’s Leading Indicator for May 2010 slumped to month-on-month negative growth for the first time since early-2009, and this is a good indication that the residential property market is set for a slowdown.
The FNB Property Barometer showed the indicator slipped 0,5%, showing a fairly hefty decrease from the +1,6% growth in April.
On a three-month moving average basis, the month-on-month growth rate was still positive to the tune of 0,9%, but this too was slower than the previous month’s 1,3% growth.
“Given residential property’s status as a sector that generally leads the business cycle, along with new vehicle sales, there is usually a good correlation between the Leading Indicator and residential property, and even more so with the residential mortgage market,” says John Loos, property economist at FNB.
He says arguably the main brakes on the growth of the SARB Leading Indicator are slowing growth rates in key global leading indicators, as well as a lack of further interest reduction since August 2009.
He says given the strong correlation between the Leading Indicator and growth in the value of new residential mortgage loans granted, it is very likely that a similar peak and decline in the year-on-year (y/y) growth rate will also commence mid-year in the new mortgage stats.
These trends chime with recent assessments by leading property industry leaders and experts that property price growth will taper off towards the end of 2010 as the effect of further interest cuts are wearing thin and the threat of a double-dip recession becomes a growing reality.
FNB’s recently released Estate Agent survey for Second Quarter Q2 2010 showed the demand for residential property dipping while buy-to-let buying fell to new lows. Demand was still up 24,4% year-on-year (y/y) in Q2, but this was a growth deceleration from the 32,3% in the previous quarter. This growth was 36,8% in third quarter (Q3) 2009.
Absa’s latest House Price Index showed that the average nominal value of small, medium and large houses for which Absa approved mortgage finance increased by a weighted 14,8% y/y in June versus 14,7% in May, indicating slower growth.
“Price growth in the South African housing market appears to be nearing an upper turning point,” says Jacques du Toit, property economist at Absa.
Loos and Du Toit agree that household debt to disposable income ratio remains stubbornly high and this has attendant effects on house price growth.
A telltale sign of this is the strong growth in the category for small houses. In the Absa Index, the prices of small houses (80 to 140sqm) have shown resilient growth in June. Not only did their growth prove to be by far the highest at 33,6% y/y, but it also showed an increase of 3,9% on its May figure of 29,7%, the largest of all the housing categories.
Dr Andrew Golding, CE of Pam Golding Properties (PGP), agrees that smaller and cheaper homes are experiencing better price growth at the moment. “It does appear that the small and medium sized home market is experiencing a much stronger recovery in prices (especially in the R300k to R1,5m price range), while the upper end of the market has not responded generally in the same way and in many cases prices achieved have only kept up with inflation i.e. no real growth.” – Eugene Brink
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