Growing availability of credit may help the residential housing market to regain some momentum from mid-year, but affordability and lack of confidence remain the two major stumbling blocks.

In spite of increased sales, improved buyer activity and further relaxed credit criteria by the banks, the residential property market still has one major hang-up — house prices remain in limbo, with very little exception. After peaking around April last year, deceleration followed and, according to the latest Rode’s Report, prices in January, on a national basis, were down by roughly one percent on the same month a year earlier.

The reasons are fairly straight forward; lack of confidence, job insecurity, fears of upward pressure on household expenses and the threat of higher interest rates. Hardly an environment for a major capital investment…

We have had a minor recovery in the market over the first five months of this year, but it has been too mild to make a significant impact on house price growth.

Buyers with cash and access to funds are active, looking for bargains. The May First National Bank House Price Index reveals a very slight acceleration in price growth from 1.2 percent year-on-year in February to 2.1 percent in May. But if one adjusts this average house price index with the consumer price index (CPI) real house price growth is around -2.5 percent. But again, this is a national average — there are pockets of sunshine amidst the gloom. Some industry analysts suggest that the negative growth trend will reverse shortly after mid-year.

It is a classic case of supply exceeding demand and the mini-recovery may well have a lot to do with the enjoyable summer months. The benefits emanating from the interest rate cuts since mid-2008 have waned and First National Bank’s property strategist John Loos warns: “This reflects the very weak financial and debt position of the household sector following the 2008/09 recession. If the residential market cannot achieve respectable house price growth after such a huge interest rate stimulus a period of house price decline would be the likely outcome of a possible phase of interest rate hiking or of slowing economic growth, or both.”

Fortunately, the outlook for economic growth looks brighter following recent indicators. First quarter GDP figures show a marked improvement in annualised growth to 4.8 percent, which is well ahead of the general expectation. The big question now is whether this growth can be maintained. The first quarter figures are worth analysing; the trade sectors showed positive growth, led by retail and finance and business services. Underperformance came from agriculture, construction and mining, while manufacturing produced an excellent performance, the latter being boosted by basic iron and steel as well as oil refining.

Business indicators tend to correlate well with residential property demand, so the upside in GDP is positive for the market.

Increased willingness by the mortgage bankers to lend should help the market in coming months. According to Saul Geffen, there has been a significant relaxation in deposit requirements, which opens up a much broader homebuyer base.

Other positive news is that the banks’ initial decline ratio is 8.7 percent lower year-on-year at 45.4 percent, while the effective approval ratio has increased significantly from 57.3 percent in April last year to 64.4 percent.

Geffen says that strong April approval rates build on recent record numbers recorded in March, when approval figure was the highest value of approved home loans since October 2008.

According to Standard Bank, mortgages with values between R350 000 and R700 000 comprise the largest share of the market. On the other hand, the bank states: “The proportion of mortgage loans granted attributable to the highest category of income earners recorded the highest annualised growth rate of any income category. In addition, the average size of mortgage loans applied for has seen a steady increase.”

Another indicator is our currency. The strong rand has its detractors, especially those in the export sector. But if the rand wasn’t strong, the effect of oil now hovering around US$107 per barrel would be severe. So despite some rise in inflation it is far from a foregone conclusion that interest rate hiking will take place this year.

Another positive indicator, closer to the residential property market, is the growth in private sector credit extension (PSCE) in the first four months of the year. The two biggest components, mortgage advances and other loans and advances (corporate credit demand), continue to drive overall growth. Instalments sales also rose in spite of the plethora of public holidays. Total credit extended to households remained at a relatively healthy pace.

At present we are just hanging in…

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The Monetary Policy Committee’s decision on Thursday to keep the repo rate at 5.5% and prime lending at 9% comes as no real surprise and offers a continued respite to debt burdened homeowners.

This was widely anticipated and is welcome, said Dr Andrew Golding, CE of the Pam Golding Property group, particularly against a backdrop of rising oil and food prices coupled with increasing electricity tariffs.

“Consumer spend generally remains cautious as a result of ongoing concerns regarding household debt.

“And amid market speculation regarding an end to the current cycle of lower interest rates, it is hoped that interest rates will remain stable at least for the remainder of this year in order to stimulate further economic growth, bearing in mind that job creation remains a key focus,” said Golding.

He said that from a residential property perspective Pam Golding Properties continues to see a gradual, albeit modest improvement in sales volumes and in house prices. “It should be borne in mind that we are still seeing the effects of the latter part of last year’s reduction in interest rates permeate through the marketplace, helping sustain residential sales across most price sectors.

“However, although relaxed to some extent, strict bank lending criteria continue to keep a rein on any significant recovery in the housing market,” added Golding.

He said that while it’s true that interest rates are at a historical low, first-time buyers entering the market still face affordability issues. This is “due to the higher municipal rates and increased electricity costs, among other costs inherent in the purchase and upkeep of a home, and this is exacerbated by restricted access to finance.”

“On a positive note, what we are noticing is that those sellers who are receptive to pricing their homes at realistic, market-related prices are reaping the benefits and achieving sales,” said Golding.

He said that for investors who have access to finance or with high liquidity, there are still good buys to be had, as property prices in the main have remained relatively constant over the past year or so. “Having said that, there are many areas or locations where properties continue to achieve sound growth in value, and will continue to do so, making the case for investment in property as valid as ever”.

While most remain cautiously optimistic about continued economic recovery, said Adrian Goslett, CEO RE/MAX of Southern Africa, there are definite signs of improvement. “Aside from the interest rate remaining stable, The South African Chamber of Commerce and Industry’s Business Confidence Index for January 2011, which is at 87.4, indicates a vast improvement from January 2009 (82.4) and 2010 (81.2).”

It is anticipated that 2011 will be a fairly flat year for the property market, said Goslett, as debt-to-income ratios are still at a relatively high level and as distressed homeowners continue to make use of the various bank programmes to assist them in selling property they can no longer afford.

“As there is still limited access to finance, rental markets are expected to peak while qualified buyers will be able to make the most of the property investment opportunities that are currently there for the taking, a situation which certainly won’t last forever as interest rate hikes are expected later in the year,” said Goslett.

Please contact us if you require any further information or would like to apply for finance:

Complete this short form online

011.327.4489 / 0861 1111 93

morne@mortgagepluscc.co.za

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