House prices depressed in 2011?

The property market is facing a bleak future if the statistics contained in the South African Reserve Bank’s quarterly review are to be believed. It shows that the household-debt-to-disposable-income ratio – a key constraint for the housing market – has actually increased from 78,2% to 78,5% in the third quarter of the year.

However, it points out that the cumulative effects of the easing of monetary policy and the decline in debt-service costs may boost confidence levels and expenditure in the property market next year.

The ratio of debt-servicing costs to disposable income declined from 8,0% to 7,8% while the cumulative interest rates cuts of 150 basis points this year will have an impact on property sales in 2011.

Tendani Mantshimuli, consumer economist at Liberty Retail says that household debt as a percentage of household disposable income increased from 64,3% in 2005 to 80,2% in 2009.

He says that households have been unable to spend the extra money they get when interest rates fall because they use this money to service excessive levels of debt.

The property market has been struggling in the current economic environment even though the Standard Bank’s data showed that house prices actually increased by 3,8% year-on-year while FNB’s data suggests a slightly higher rise of 4,8%.

In the three segments measured by the Absa House Price Index there were clear indications that house price growth was lower in both nominal and real terms in November this year and based on these figures, the major banks are predicting that there will be modest growth of below 5% in 2011.

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Summary

• The South African economy emerged from recession in the second half of 2009,
with real GDP rising at an annualised rate of 0,9% in the third quarter. Positive real
economic growth of 2,5% is forecast for 2010.

• Despite a trend of declining interest rates during the course of 2009, the household
sector continued to experience a fair amount of financial pressure on the back of
major job losses over a wide front, declining real disposable income and relatively
high levels of debt. However, the cost of servicing household debt declined
markedly as a result of lower interest rates.

• House price growth in all segments of the market slowed down further during the
course of 2009, with some categories recording a nominal drop in prices. In real
terms, prices declined further in all segments.

• In 2009 the average price of affordable houses increased by 2,8% to R291 700 in
nominal terms, while declining by 4% in real terms. In 2008 prices in the affordable
segment increased a nominal 10,2%, but dropped by a real 0,8%.

• House prices in the middle segment of the market declined by a nominal 0,2% to
R965 700 in 2009, after prices dropped markedly in the first half of the year, but
started to recover in the second half. A nominal price rise of 4,1% was recorded in
2008. In real terms middle-segment house prices declined by 6,8% in 2009, after
dropping by 6,2% in the previous year.

• In the luxury segment of the market house prices were up by almost 1% to about
R4,5 million in 2009, compared with a growth rate of 8,8% in 2008. The average
real price of luxury housing was down by 5,8% last year after declining by 2% in
the preceding year.

• At provincial, metropolitan and coastal level, house prices were marginally up last
year in some regions in nominal terms, but after adjustment for the effect of
inflation, price declines occurred in all areas compared with 2008.

• The affordability of housing improved further during the course of 2009, based on
the ratio of house prices as well as mortgage repayments to disposable income.
This was the net result of trends in nominal house prices, nominal household
disposable income and interest rates.

• The steady recovery evident in the residential property market since late 2009 is
expected to gather further momentum in 2010 as a result of better economic
conditions, the lagged effect of lower interest rates and less tight credit conditions.
Nominal house price growth of around 6% is currently forecast for 2010, but with a
projected average consumer price inflation rate of also 6%, no real price growth is
expected this year.

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