House price growth still in single digits

Johannesburg - Nominal year-on-year growth in the average value of homes in the middle segment of the South African housing market remained in single digits in the first month of 2014 after tapering off during most of last year on the back of trends in the economy, household
finances and consumer confidence.

This is according to Jacques du Toit, property analyst at Absa Home Loans.

In real terms, that is after adjustment for the effect of consumer price inflation, house prices deflated further in two segments of the market compared with a year ago, while showing low single-digit growth in one segment.

These trends observed in house prices are according to the Absa house price indices, which are based on applications for mortgage finance received and approved by the bank in respect of middle-segment small, medium-sized and large homes.

The average nominal value of homes in January in each category was:

- Small homes (80m²-140m²): R764 000;

- Medium-sized homes (141m²-220 m²): R1 104 000;

- Large homes (221m²-400m²): R1 710 000

Consumers continue to experience financial strain, said Du Toit.

Growth in real household income and consumption expenditure remains low on the back of inflationary pressures and subdued employment growth, while the savings ratio does not show any significant improvement.

"In view of current trends in and prospects for the economy and the household sector, as well as recent trends in house price growth, continued single-digit nominal price growth is forecast for 2014," said Du Toit.

"Some real house price deflation is projected for this year, based on the combined effect of expected trends nominal price growth and inflation."

Negative equity risk for owners as property prices stall

Real house prices in South Africa are declining at rates last seen 25 years ago as economic growth stagnates.

Home owners face the prospect of owning negative equity as house prices are expected to continue to decline for the rest of this year and the next on rising inflation, which is forecast to breach 6% soon.

Jacques du Toit, property analyst at Absa Home Loans, said on Thursday that, based on house price trends up to the third quarter, and prospects for the economy and household finances, nominal price growth in the middle segment of the market was forecast to be 2%-2,5% during all of next year.

Absa Home Loans, South Africa’s biggest mortgage lender, released its fourth-quarter housing review on Thursday. It warned that while the affordability of housing remained favourable to consumers for most of this year, their ability to take advantage was hampered by a high level of indebtedness, impaired credit records, the National Credit Act and banks’ resultant lending criteria.

"In real terms — after adjustment for the effect of consumer price inflation — house prices declined year on year and quarter on quarter," Mr du Toit said.

The chairman of Seeff Properties, Samuel Seeff, said on Thursday that he had not seen such a depressed property market in South Africa in 27 years.

"I see property prices staying where they are. We are seeing an abnormally long property price recession," Mr Seeff said. "This is a tough time for the industry and we need distressed stock to work its way through the industry."

Mr Seeff said the property market needed " more enthusiasm". An increase in employment would help , but it looked unlikely to happen next year.

"Employment would push up demand for houses. But as it is, there is just no impact from developers. We have seen virtually no stock coming on to the market in the last two years," he said.

Property economist Erwin Rode said real-term house prices were declining at rates last seen in the mid-1980s, but they were still too high relative to demand constraints.

"Real-term house prices are declining. Yet, they are still too high relative to people’s income levels, especially considering that consumers are highly indebted.

"Taxes are biting. The fiscus is under pressure. Economic growth drives house prices and it’s not strong right now," Mr Rode said. "I would say that, more and more, the market is coming to the realisation that house prices won’t grow for years to come."

Mr Rode said investors who buy to let right now could expect a net income yield of 4%-5%.

"Houses are currently overpriced. While I understand that people want property to be an alternative to investing in other things, I wouldn’t buy for the next four years," he said.

Mr Rode said property cycles usually lasted for 18 years. "The cycle peaked in 2007. We have a long way to go," he added.

Mr du Toit said the ratio of household debt to disposable income had dropped to about 76% in the second quarter, which contributed to containing the cost of servicing debt against the background of low interest rates.

However, many consumers were battling with impaired credit records, hampering their ability to take up credit, which was reflected in continued low growth in household credit extension.

"The continued low growth in outstanding mortgage balances in the household sector is indicative of the impact of these factors on the residential property market, and the demand for and accessibility of mortgage finance," Mr du Toit said.Negative equity risk for owners as property prices stall