Why a recovering US property market bodes well for South Africa

The United States has long held sway over the global economy and as such its welfare has had far reaching implications for the rest of the world. Cue the sub-prime mortgage crisis in 2007 which effectively crashed the US housing market, and of which the effects are still very much in evidence, particularly in America and parts of Europe.

"Due to the US's incredible economic power we've often noticed that the local property market tends to lag between three to six months behind the American market", says Bruce Swain, MD of Leapfrog Property Group. As such local estate agents and buyers are inclined to keep an eye on developments in the US. "Of course South Africa is a different kettle of fish and one would be foolish to assume all movements in the US market will be mirrored in ours but, it does often give one an indication of what could be headed our way", says Swain.

Even earlier in 2012 many still doubted as to when the US real estate market would begin recovering. Now it would seem that revival is in sight; JP Morgan & Co and Wells Fargo & Co, the principal home lenders in the States report double-digit quarterly earnings growth last week. According to Sterne Agee, a banking analyst from Todd Hargeman as reported in the LA Times, both companies "clearly expressed a view of signs of recovery, if not stabilization".

The "Improving Markets Index" as compiled by the National Association of Home Builders and First American Title Insurance indicates that a 103 housing markets across the US now qualify to be listed, up from 76 in January 2012. Barry Rutenberg, chairman of the National Association of Home Builders (NAHB), believes that; ""This is an encouraging sign that the housing recovery is proceeding at a steady pace as firming prices and employment help spur new building activity, which in turn generates new jobs and more home sales."

Whilst improving markets are still a far cry from stable or even better, growing markets, it is the first sign that the American housing market is recovering. Broadly speaking any recovery in the States is bound to filter through to the rest of the world, which should eventually lead to rallying of exports from SA to Europe and other economic corrections. These corrections will hopefully lead to more job creation, increased earnings and ultimately, the amelioration of the local property market.

That being said, there are local factors that have a greater, and more immediate, effect on the SA industry such as the recent wild cat strikes and the tragedy that took place at Marikana, the staggering level of unemployment and the downgrading of our sovereign debt. These circumstances shake investor confidence, decreases international funding, threaten our exports and ultimately culminate in an impoverished economy.

Factors that contribute more directly to the property market include the lack of household savings, the high level of household debt-to-disposable income ratio, the increase of municipal rates and the difficulty of obtaining a home loan.

Bruce Swain believes that the South African Reserve Bank has done what it can to aid the property market by keeping the repo rate at a low 5%. According to John Loos, Household Sector and Property Strategist at FNB, the greatest problem the market now faces is the lack of household savings. At present the household debt-to-disposable income ratio stands at 76.3% (an increase over the first two quarters of 2012). Loos states that: "This savings shortage is a serious structural issue not only constraining the housing market but also many people's ability to retire financially sound."

Combined with the fact that banks' lending criteria are now considerably more stringent than four or five years ago the reality is that many potential buyers cannot amass the deposit needed to secure a loan.

Of course saving isn't the only problem. Municipal rates and tariffs have increased: Loos points out that where the average house price/average remuneration ratio fell by -24.4% since 2008, the rates and tariffs/remuneration has increased by 6.54%. Savings are less and properties are costing more to maintain – hardly a recipe for a sound property market.

That being said, the local property market is still stable, if sluggish, and there are slight indications that it's picking up. Yes, South Africans need to start saving there's no doubt but, our market didn't take the hit many of its international siblings did and with the stable repo rate and banks easing their lending criteria somewhat there is hope. Sellers are still placing their homes in the market and the buyers are there. "Remember, regardless of the current global and national economic situation, property is a long term game and the industry will correct itself in time. Patience is key during this period", advises Swain.

http://www.eprop.co.za/news/item/14455-why-a-recovering-us-property-market-bodes-well-for-sa.html

Rental Property - do your (Home) work

Johannesburg – If there was ever a right time to buy a house it is now, said Warren Buffett, chairperson and chief executive of Berkshire Hathaway in a recent interview on CNBC.

Buffett, who is worth around $44bn, is the second-richest man in the world, according to US magazine Forbes.

Buffett considers houses the top investment currently, but then not any old house – buy bargain homes that can be financed with 30-year loans, with the idea of letting them out.

He considers it a wonderful plan to buy a few hundred thousand such houses and obtain home loans at very low interest rates.

In the US interest rates can be fixed for long periods, which makes the low cost of finance advantageous.

This is what Buffett would have done if he knew where he would find himself over the next 10 years.

He says five years ago people could not buy houses fast enough because they thought prices would continue to rise, but now they are not buying because they think prices will continue to fall.

“This creates an attractive asset class for residential investors.”

As far as his own home is concerned, Buffett does not flaunt his wealth. According to Forbes he still lives in the same relatively modest home for a billionaire in Omaha, Nebraska, that he bought in 1958 for $31 500.

Rode & Associates property valuer and economist Erwin Rode agrees with Buffett that this is the right time to buy in the US, but he says this in no way applies to SA’s housing market.

“In the US there has been a significant correction in house prices and prices have in real terms dropped close to their long-term trend line, which makes it a good time to buy.”

South Africa’s housing market has not experienced such a correction, according to Rode.

First National Bank property analyst John Loos says that the South African housing market still has to reach the bottom of the cycle. “Although it is currently a better time to buy than four years ago, it's still not the best time.”

Magnus Heystek of Brenthurst Investments says the best time to buy any asset is when the market is down, not when it is booming and everyone is talking about it and boasting good results. “It’s like waiting for shares to reach record lows and then to buy them.”

Heystek says the best profits are generally made in the initial stages of a revival, not the final.

SA’s residential investors have still not regained the healthy appetite for buy-to-let properties seen before the recession.

The percentage of investors in rental properties was an uninspiring 8% of all buyers in the fourth quarter of 2011, as shown by FNB’s property barometer. This is a mere drop in the ocean compared with the 2004 high of 25%.

Rode reckons this shows that buy-to-let investors are probably showing good sense. “Interest rates remain a huge unknown, which is one of the reasons they have not re-entered the market.”

Would you buy this Holiday Property?

The South African holiday property market is said to be suffering currently as property buyers are choosing to purchase primary residences instead.


Aerial view of Myoli and Cola Beaches in Sedgefield

According to estate agents surveyed in the FNB Property Barometer Holiday Towns versus Metros Q2 2011 report, demand for holiday property homes has declined.

The report suggests that holiday-driven property regions in South Africa are more cyclical than primary residential-driven major metro regions, reaching higher peaks in the booms and lower troughs in the tough economic times.

FNB Home Loans property strategist John Loos says after a recovery of around 1 percent in mid 2010, the estimated holiday property buying expressed as a percentage of total residential buying dropped from 3 percent in Q2 2011 to 2 percent in the third quarter.

Loos says the percentages remain below the 5 percent level recorded at the beginning of 2007.

He explains that the continued focus primarily on primary residential buying means that major metro housing markets appear to outperform those towns more strongly driven by holiday property demand.

The FNB Holiday Towns House Price Index remains in deflation territory of -4.9 percent year-on-year in Q3 2011 while the country’s six primary residential demand-driven metros showed house price growth of +3.8 percent.

Both indices are estimated using Deeds Data transactions by individuals, he adds.

Estate agents operating in some holiday towns in South Africa report an increase in buyers who seek a better quality of life away from bustling cities.

Jawitz Properties report that Ballito in KwaZulu-Natal has shed its holiday resort image and is fast becoming a popular residential town enticing many Gauteng buyers.

Keith Brown, Jawitz Properties principal franchisee says the property market in Ballito is looking up adding that although there have been fewer property sales than pre-2008, home prices have not come down as dramatically as in other areas in KwaZulu-Natal.

This luxury six bedroom, four bathroom log home (currently used as a guesthouse) is situated in the beautiful Cola Conservancy in Sedgefield and is priced at R2.3 million through Pam Golding Properties.

Brown says the market has been reasonably stable for the past year and is expected to remain steady in 2012.

“Supply and demand always plays a role in pricing as well as external factors such as the bank lending criteria and the economy.”

He says the greatest value is still in the suburbs where homeowners pay less per square metre and demand for older homes that need renovation has increased with stock shortages.

The average price for a three bedroom family home is R1.9 million while a renovated home of equal size starts from R3 million.

Properties in gated estates are priced from R3 million and two bedroom sectional title units on the beachfront cost anything from R1.5 million depending on location and age of building.

He says the lower end of the market up to R1.5 million is the most active segment fuelled mainly by first-time buyers who qualify for home loans. The middle income segment buyers in the price ranges of between R1.5 million to R3.5 million are faced with affordability issues making it difficult to access finance and sales are quite slow in the upper end of the market.

“Deals when they do occur, are usually generated by cash buyers or bridging finance,” he says.

The coastal town of Sedgefield in the Western Cape not only remains a village of choice for retirees but has recently been attracting new buyers including sports enthusiasts, reports Pam Golding Properties (PGP).

Walter Bakker, PGP Sedgefield marketing manager says this town where the pace is slow (thanks to its newfound Cittaslow status as a result of the annual Slow Festival every July) has seen increased global exposure attracting interest from buyers wanting to own homes in the area.

Bakker says homes priced from the early millions are being snapped up by investors and buyers who waited to capitalise on opportunities to finally purchase their longed-for seaside home.

He says two bedroom homes with a full one bedroom guest suite with own kitchen are priced at R895 000 and R999 000 buys one a family home.

Bakker says Sedgefield is ideally suited for those who work in nearby Knysna or George and prefer to live in a quiet village yet be within easy driving distance of these towns.

Building activity in Sedgefield has resumed with new homes being developed in suburbs such as Cola Beach in the Cola Conservancy.

This character-filled one-bedroom fisherman’s cottage is on the market in Pringle Bay, exclusively through Pam Golding Properties. The cottage is located on 600 square metres of pristine fynbos garden within walking distance of the beach. It is priced at R850 000.

Bakker adds that 60 to 70 percent of permanent residents in Sedgefield are homeowners making it a desirable place to live.The Cape coastline from Gordon’s Bay towards the southern Cape is renowned as one of the most beautiful scenic drives in the world and whale-watching opportunities.

PGP managing director for the Boland and Overberg region, Annien Borg says the Whale Coast, spanning the towns from Pringle Bay in the west to Gansbaai in the east offers a wide range of property options at attractive prices.Borg says there is something to suit every need and price range, from vacant land to apartments, compact holiday homes and luxury seaside mansions.

“The individual towns vary in size, amenities and property offering but what they all have in common is a magnificent seaside setting and a slower pace of life, ideal for holidaymakers, retirees or those who simply want to opt out of the hustle and bustle of big city living.”

PGP says Betty’s Bay is renowned for its magnificent botanical gardens and extensive network of beaches and inland waterways.

A vacant 600 square metre plot in Pringle Bay costs under R400 000, a small holiday cottage under R850 000 and larger family homes for between R985 000 and R1.4 million.

In Betty’s Bay, modern family homes with four bedrooms or more located slightly back from the seafront are available for between R950 000 and R1.8 million.

Prices increase with proximity to the sea and on the coastline itself there are a number of modern luxury homes selling for between R3.2 million and R7.5 million.

Kleinmond is the largest town in the area offering more extensive amenities including two primary schools, four shopping complexes, gyms, doctors and pharmacies.

Prices start from R250 000 for a 600 square metre plot and R550 000 for a two-bedroom apartment. Smaller homes are priced from R890 000 to R1.2 million while larger family homes cost between R1.4 million to R6.5 million.

Hermanus is now a thriving, bustling town with excellent beaches, superb sailing on its lagoon and a variety of other outdoor activities to enjoy.

Vacant land in Hermanus can be obtained from around R1 million and bachelor apartments for R450 000.

This timber-frame cottage is located close to the beach and adjacent to the green belt in Betty’s Bay. Occupying a stand of over 1000 square metres, the three-bedroom home is on the market through Pam Golding Properties for R1.1 million.

Larger apartments with multiple bedrooms are priced from R800 000, the entry level for homes is around R1.5 million and larger family homes located closer to the beach in prime suburbs can fetch anything from R6 million to R10 million.

Gansbaai and its satellite villages such as De Kelders, Franskraal and Kleinbaai are world-renowned as white shark cage-diving territory.

The growth in this niche tourism market has led to the area’s expansion in recent years offering a number of new developments with land costing as little as R400 000 for 600 square metres, says PGP.

A starter home on a sizeable plot costs less than R800 000, larger three- or four-bedroom houses are priced at R1 million and luxury beach houses are priced from R7 million to over R10 million, according to PGP

Household Debt-to-Income improves - South Africa

Debt-to-disposable income has decreased in the second quarter, causing debt service risk to decline further from 6.18 to 6.10 according to the FNB Household Debt-Service Risk Index.

John Loos, FNB Home Loans Strategist, said that this decline implied a decline in the household sector's vulnerability to any unwanted events such as interest rate hiking or economic growth slowdown, which could impair its ability to service its debt at some future stage.

He said that the index takes into account the level of household indebtedness, as expressed by the household debt-to-disposable income ratio, the direction in which this ratio is moving (currently downward), and the level of interest rates (prime rate) relative to long term consumer price inflation (5-year average inflation).

The lower the debt-to-disposable income ratio goes, the lower the risk, and downward momentum in the debt ratio thus also exerts downward pressure on the overall Debt-Service Risk Index.

The decline in the ratio has been brought about by slow single-digit growth in the value of household sector credit in recent years, enabling nominal disposable income growth to outgrow the pace of credit growth according to Loos.

He said the pace of decline had been slow going, however, as disposable income growth since the recession in 2008 had also remained slow compared to the pre-recession boom years. Nevertheless, the second quarter did show some further rise in year-on-year disposable income growth from 8.9% in the first quarter to 9.9%. This, along with a slowing household credit growth from 6.8% in the first quarter to 6.4% in the second quarter, resulted in further reduction in the debt-to-disposable income ratio.

Loos said that reducing the debt-to-disposable income ratio further looked set to continue to be challenging, because the renewed economic slowdown of late looked set to see slowing disposable income growth in coming quarters.

"However, we believe that the downward trend will continue at a gradual pace due to simultaneous slowing in household credit growth, reaching a level below 70% during 2013," Loos said.

He said that on the other hand, the lower interest rates get, relative to long term average inflation, the higher the risk for the household sector becomes, because this implies a diminishing probability of further interest rate cuts and an increasing probability that future interest rate moves could be up.

Therefore, Loos continued, a slight rise in the five-year average inflation rate in the second quarter, brought about by a recent rise in consumer price inflation, had exerted slight upward pressure on the overall index. However, against this, a further decline in the household sector debt-to-disposable income ratio, from the previous quarter's 76.8%, to 75.9% in the second quarter, had offset increased interest rate risk and caused the Household Sector Debt-Service Risk Index to decline further in the second quarter.

This level of debt-service risk, however, remains high by historic standards, with the long term average since 1970 being 5.1 according to Loos. Further significant reduction in the debt-to-disposable income ratio would thus appear essential. The lowest level of 2.74 was achieved in the final quarter of 1998, and it was this low level that preceded the start of one of the country's great consumer and home buying booms. - I-Net Bridge

Financial pressure as rentals improve

At least 25% of houses sold in the second quarter of this year were the result of financial pressure on the household. According to John Loos, property strategist at FNB Home Loans, financial stress and pessimism about the future had contributed to the rising stock levels for estate agents.

He says that in the first quarter, low interest rates had been cited by estate agents as a key factor that influenced the outlook for home sales but in the second quarter this changed and houses are available on the market because the owners want to reduce their monthly costs.

Loos says that when interest rates rise – expected later this year or early next year – the financial strain will be even greater for homeowners who are already hard-pressed to meet their monthly commitments.

He says that regional property demand tends to be seasonal and that generally the outlook among estate agents remains rather low in winter.

In a separate development, Saul Geffen chief executive of ooba, one of the country’s mortgage originators, says that banks are continuing to relax their lending criteria and this is having an impact on sales figures.

He says the initial decline ratio fell by 5,8% in the second quarter of the year but remained high at 47,1%.

Loos says that fewer agents see the low interest rates as being a significant factor in boosting house sales and emphasised that agents point out that there has been a significant rise in the number of people seeking to downscale their living costs.

Meanwhile credit bureau and property rental management company, TPN says that 81% of tenants are currently in good standing with their landlords. According to TPN this is a sign that residential tenants are managing their credit better than in previous years.

The rental price bracket of between R3k and R7k proved to be performing particularly well with 84% of tenants in good standing and paying their rent on time.

However, in the price bracket below R3k as well as those above R12k had deteriorated and it says that this is further evidence of the financial strains that are currently facing many consumers. Only 75% of tenants living in homes costing less that R3k a month were in good standing while the percentage of paying more than R12k had fallen to 74%.

Non-payment of rental in both these brackets was 14%. Furthermore in the R12k-plus bracket only 67% of people paid on time while those who pay late was also at 14%.

It says the residential property markets in the Eastern and Western Cape continue to out-perform the markets in Gauteng and KwaZulu-Natal.

Generation X leads property recovery

Generation X will lead the property market to recovery in the US and in SA. A more positive sentiment has returned to the market in the US as well as in South Africa, especially among professionals who can afford to take advantage of the current market conditions.

A report by an American company, John Burns Real Estate Consulting, revealed that of the 10 000 buyers and potential buyers they surveyed in 27 metro areas throughout the US, between 85% and 89% said that they felt now was a good time to buy a home and most felt optimistic about a new home purchase.

There has been a marked increase in activity in both the local and international property markets in the first quarter of 2011; however recovery in the global market continues to be slow as countries are experiencing different rates of recovery depending on the various economic policies they have in place.

In the US market, for example, the unemployment rate has reduced and the US stock exchange has rebounded massively since 2009. Positive property statistics have been reported with an increase in transaction volumes, especially in existing home sales and there continues to be a strong demand for distressed properties.

As with the case in the US, South Africans are currently seeing more realistic property pricing and are experiencing the lowest interest rate in the last 38 years. This has had an influence on the market and has contributed positively to the increase in property transactions. Added to this, realistic house prices and interest rates have also opened up the property market to people who could not afford to buy a house five years ago.

Around the world the Generation X population, which consists of adults between the ages of 31 and 45 who are generally well established in their careers, are looking to get their foot in the property-ownership door. According to real estate experts, these potential property buyers are most likely to decide that given the current market conditions, now is a good time to purchase a property. The Generation X market segment makes up 32% of the property-buying population in the US. While they are not the largest population-buying group, they are definitely the most active. In contrast Baby Boomers in the US, who make up 41% of the property-buying population, are still trying to make up losses in their savings and investments due to the recession conditions of the last few years and are more cautious in their buying decisions.

Statistically the population demographic in South Africa looks slightly different; Baby Boomers make up a much smaller percentage of the population than Generation X. Between the years 1950 and 1965 there were 13,5 million births in South Africa (Baby Boomers) compared with the 18,74 million births (Generation X) between 1965 and 1985.

However, when it comes to buying population, South Africa has many similarities to the US. According to John Loos, FNB Home Loan Strategist, the most noticeable increase in the property market buying share in South Africa was among the Generation X group who made up 28,1% of the total purchases in the first quarter of this year. This is compared to the Baby Boomers whose buying share increased to 21.17% of the total purchases in the first quarter of this year.

Younger buyers have also made their mark on the property market recently and it seems that Generation Y will not be outdone by their predecessors. Loos says that information from Deeds Office data on individual transactions revealed that in the last four quarters, 15.3% of first time buyers were under the age of 30.

Overall market confidence has improved and we have seen a higher number of first time buyers in the first quarter of 2011 than during the last quarter of 2010. It is clear that it is the younger professionals who are leading the property market recovery both in South Africa and abroad. Although we may still have an interesting road ahead of us in terms of full market recovery, things are definitely looking up for property markets around the world.

*Peter Gilmour is the Chairman of RE/MAX of Southern Africa

More first time home buyers show confidence in market - FNB

There were more first time home buyers in the first quarter of 2011, indicating improved confidence in the property market, FNB Home Loans strategist John Loos said on Wednesday.

"The increase in first time buyer demand relative to the overall market demand is a good confidence indicator due to the greater degree of flexibility that an average first time buyer has in terms of timing his/her entry into the market," Loos said in a statement.

He said this reflected "improved new buyer confidence in lagged response to a dramatically improved interest rate environment since 2008".

It also showed improving confidence by the banks offering home loans.

First time buyers made up 22 percent of total buyers in the first quarter of the year, compared to 17 percent in the previous quarter.

"This percentage now compares favourably with the percentages recorded around late-2006, although the absolute volume would still be significantly lower than then because the overall market volumes are considerably lower these days compared to then," Loos said.

The "ageing buyer" trend seen in recent years was being reversed as a result of the improved interest rate and credit environment, and the resultant emergence of a more significant group of first time buyers.

Loos said using Deeds Office data on individuals' transactions, it was estimated that in the four quarters up to and including the first quarter of 2011, 15.3 percent of total buyers were aged 30 and below.

This was up from 14.7 percent in the fourth quarter of 2010, and even higher than the low point of 11.4 percent in the third quarter of 2009.

Loos said the most noticeable increase in market share was among the 31 to 40 years age group -- making up 28.1 percent of total buying in the first quarter of 2011.

This was up from 21.8 percent for the four quarters up to the third quarter of 2009.

The 41-50 year age increased its share of total buying from a 17.7 percent low as at the third quarter of 2008 to 21.7 percent as at the first quarter of 2011.

The 50-plus age group had seen its share drop from 48.8 percent as at the second quarter of 2009 to 35 percent as at the first quarter of 2011.

Loos warned potential first-time home buyers to be aware that inflation could rise, leading to increasing interest rates, so they had to be sure that they could absorb any increases.

"... Three percentage points [from prime rate of nine percent to a rate of 12 percent] would mean that on a bond amount of, say R700,000 at prime rate, the monthly instalment would increase by about R1410 per month."

He also reminded buyers to take into account above inflation increases in municipal rates and tariffs "which have become a far more significant property-related cost in recent years".

Positive sentiment for the Buy-to-Let Market

Data availability for the rental market is far less comprehensive than for the home buying market in South Africa.

However, with what data we have it would appear that the fundamentals of the rental market may be improving, and this may lead to rental market strengthening in 2011.
During the property boom years, buy-to-let buying of residential property was taking place at a far greater pace, implying that the supply of rental stock coming onto the market was growing rapidly.

This appears to no longer be the case. In the 4th quarter FNB Estate Agent Buy-to-Let survey, buy-to-let buying remained at a lowly estimated 7% of total buying, unchanged for the 2nd successive quarter, a far cry from the estimated 25% back early in 2004.

This buy-to-let weakness comes as little surprise, with the household sector still under very significant financial pressure, as well as being highly-indebted, while banks' credit criteria remain conservative by the standards of a few years ago.

This not only constrains the supply growth in rental stock, but also keeps a greater number of would-be first time home buyers in the rental market for longer than would otherwise be the case, thereby supporting rental demand.

In addition, very low house price inflation means that our property-related real prime rate, i.e. adjusting prime rate for house price inflation, remains positive (+5.4% in December 2010). This curtails the short term speculative component of buy-to-let buying, where buy-to-let buyers are more focused on profiting through short term capital growth on property outstripping interest rates.

This form of buying is believed to have been far more significant during the boom years, where at one stage of 2005 the property-related measure of real prime rate was negative to the tune of -25.3%, a speculator's paradise.

Lower interest rates and a growing economy (albeit mildly) may have also brought about a better quality of tenant.

According to credit bureau, TPN, there has been a broad improvement in the quality of tenants since early-2009. As at the 1st quarter of 2009, only 71% of tenants on TPN's records were "in good standing".

During the 2nd and 3rd quarters of 2010, this percentage has risen to 82% and 81% respectively, the highest percentages since back in the 1st half of 2008 prior to the national recession. Yes, many tenants, like home owners, were also affected by recession and high interest rates back then.

The more recent apparent improvement in tenant quality also bodes well for an improvement in the rental market.

Not surprisingly, therefore, StatsSA rental estimates have started to show a rental inflation acceleration.

Given the lack of supply growth in rental stock, and reason to believe that significant financial barriers to entry to home ownership exist at present, it came as little surprise that we started to see an upward turn in StatsSA's CPI home rental inflation survey numbers.

Done on a 3-monthly basis, inflation in actual residential rentals rose from 4.5% in June to 5.6% year-on-year in the September survey. This represents a turnaround from a steadily de-celerating rental inflation rate since back early in 2009.

The initial rental inflation rise nevertheless points to a still financially pressured household sector, with "smaller being better", and thus the fastest rental inflation acceleration took place in the flats category (8.6%, up from 6%). By comparison, townhouse rental inflation measured 4.4%, moderately up from 4% in the previous quarter's survey, while house rental inflation was virtually unchanged from the previous survey.

Rental inflation rise in 2011 will be important for an ultimate recovery in buy-to-let demand.

A lack of buy-to-let demand in recent years especially through 2010, implying slow growth in rental stock, is crucial to our belief that we will see some acceleration in rental inflation through 2011.

In addition, given our expectation that consumer price inflation will gradually rise further through 2011, after 2 successive months of increase late in 2010, it looks increasingly unlikely that the SARB will cut interest rates any further for the time being at least, and sideways movement in rates through 2011 is anticipated.

This may put the brakes on 1st time home buying, keeping more would-be home buyers in the rental market and thereby supporting rental demand.

An expected rise in rental inflation in turn has 2 possible effects. Firstly, given very low expected house price inflation, we believe that gross yields on residential property will rise through 2011, and this is a key pre-requisite to larger numbers of investors returning to the market at some future stage.

Secondly, however, it can have the shorter term effect of contributing to rising consumer price inflation which could ultimately mean rising interest rates (although Firstrand only expects interest rate hikes to commence early in 2012).

In the 4th quarter 2010 FNB Estate Agent Survey an increased portion of the sample of agents expected an improvement in 1st quarter 2011 buy-to-let buying. This drove the FNB Buy-to-Let Confidence Indicator slightly higher to 0.065 (scale +1 to -1) from a previous quarter's low point of 0.045.

This is an interesting turn in estate agent sentiment after 5 previous quarters of deterioration.

In our own opinion, any noticeable improvement buy-to-let buying may take somewhat longer. However, we do believe that the fundamentals that ultimately drive the buy-to-let market, i.e. a stronger rental market and higher yields on residential property, should improve significantly through the course of 2011, setting the buy-to-let market up for strengthening at a later stage.

*John Loos is a strategist at FNB Home Loans

First-time buyer segment resilient

There is unflagging improvement in the residential market's first-time buyer segment, which rose from 14% of total buying in Q2 2009 to 19% in Q4 2009.

On top of that, it is expected to rise even further during the course of the year to comprise an even bigger share of total buying.

This was one of several positives in FNB's Residential Property Barometer for Q4 2009.
"The group probably benefits more than many others from the banks' recent relaxation of deposit requirements on home loans, as these buyers are probably a low savings group even by South Africa's weak savings standards," says John Loos, property economist at FNB.

"This source of demand is typically more cyclical than the overall market, and it is expected to rise to a higher percentage of the total in the coming quarters. I expect the growth in this segment to continue for another quarter or two.

"But it won't reach 30% of total buying like in the boom years," Loos said.
The other main positives emanating from the report are the reduction in selling time and greater price realism and affordability.

Where a property took on average 16 weeks and four days to sell in 3Q 2009, this figure dipped to 13 weeks and two days in Q4 2009. "This represents a big decline from the peak of 21 weeks and one day just two quarters ago."

In the final quarter of 2009, survey respondents reported that the overwhelming majority of sellers, i.e. 89%, still had to ultimately drop their asking price in order to make a sale. "This percentage was, perhaps surprisingly, up from the pervious quarter's 83%."

"However, the faster pace of the average sale suggests greater realism, not necessarily in the form of sellers deliberately asking for lower prices, but rather in terms of the demand side catching up, and buyers putting in stronger offers."

On the point of affordability, the report showed that the reasons for selling given by estate agents have begun to point towards a mildly better financial position of households.

"Downscaling due to financial pressure during the fourth quarter declined from 28% in Q3 to 24% in Q4. The percentage of downscaling sellers at the higher end of the market is noticeably less than the lower end."

"Simultaneously, selling in order to upgrade rose further from 12% of total sales to 15% over the same two quarters."

Loos says 52% of agents surveyed anticipate better activity in Q1 2010 when compared with Q4 2009.

But the report also had some negative findings, such as the state of the buy-to-let market, indications that the growth trend is nearing its end and a slight increase in emigration as a selling factor.

Loos said the start of a declining growth trend started appearing in Q4. "We'll start seeing a plateau in the demand for houses as the effect of lower interest rate cuts starts wearing thinner.

However, 2009's fourth quarter still saw positive growth to the tune of 23,7%, which is strong but lower than the 36,8% of Q3.

"The buy-to-let market has showed no significant improvement when its activity is expressed as a percentage of total activity. Its share of total buying is 13%, which is unchanged from 2009's third quarter."

Emigration selling expressed as a percentage of total sales rose slightly from 6% in the previous quarter to 7% in Q4. "This suggests that after the strong downward trend in this percentage, from the 20% high at a stage of 2008, the rate of emigration selling may be levelling out."