Global house prices continue to fall

Global house prices increased by only 1.8 percent in the year to March, the lowest annual rate of growth recorded since Q4 2009.

Pam Golding Properties reports that Cape Town's Atlantic Seaboard area including City Bowl, remains relatively recession-proof.

According to the Knight Frank Global House Price Index Q1 2011, in regional terms, Asia remains the top performing continent recording 8.4 percent growth over the last 12 months. This is down from 17.8 percent a year earlier.

Liam Bailey, head of residential research at Knight Frank told Property24 that overall, price growth for the countries tracked within the index has remained in positive territory since Q4 2009.

This he says has been largely as a result of the Asian housing market boom, which led in some cases to annual price inflation of between 30 and 40 percent in locations such as Hong Kong and Singapore.

“The anti-inflationary measures taken by Asian governments to cool their overheated housing markets in 2010 and 2011 have started to take effect and this has had a dampening effect on the index’s overall price growth,” says Bailey.

In Q1 2010, Singapore recorded annual price inflation of 24.1% and this fell to 10.5 percent in Q1 2011. House price growth in Hong Kong declined from 32.8 percent to 24.2 percent over the same period, he says.

Other strong performing countries where governments are fighting to pull inflationary pressures under control were India (21.9 percent) and Taiwan (14.3 percent).

The weakest region was North America which saw a fall of 0.4 percent in values in the year to Q1 2011.

House prices in South Africa fell by 1.3 percent in the year to March 2011 as recorded in the index. In March 2010, the average house price was R1 051 997 but by March 2011, this figure had fallen to R1 038 322. In the three months to March 2011, the average house price rose by 1.5 percent, explains Bailey.

Asked where the South African market is headed in the next few months to end of 2011, he says the market presents risks and opportunities.

Globally, sovereign debt concerns in US and Europe could weaken investor confidence. Secondly, interest rates in South Africa may have bottomed out and may start to rise in 2012.

“This could threaten first time buyer demand, which has been solid in recent months and an important driver of market activity.”

On opportunities, Bailey says there is growing evidence that an increasing number of homeowners are selling due to financial pressure and opting to rent. This move could boost supply and may attract more buy-to-let investors to the sales market.

“South Africa’s trade links with China (and other BRICs nations) have strengthened considerably in the past two years.”

This modern double-storey home in Mostertsdrift, Stellenbosch, is on the market exclusively through Pam Golding Properties, priced at R18.5 million. The home is set on 2000sqm, and was built in 2008. It offers six en-suite bedrooms.

According to the Department of Trade of Industry two-way trade between China and South Africa reached R119.7 billion in 2009. This means China surpassed the US as South Africa’s largest trading partner.

Bailey says the strongest performing housing markets have seen a convergence of factors such as high demand, constrained supply, significant wealth generation and benign economic conditions.

“Supply can be controlled but housing markets are also intrinsically linked to confidence.”

Government and monetary policy decisions such as maintaining interest rates at historical lows has helped to keep the momentum going in the western housing markets.

“We expect to see the current slowdown in global housing markets to continue, hitting a low point in Q4 2011 (assuming the Asian markets continue to cool and the government intervention is successful) but with a slow recovery in global house prices taking place in 2012,” adds Bailey.

Absa Home Loans property analyst, Jacques du Toit says the global housing market is very mixed. Some countries are showing growth while others are still under pressure.

“In South Africa, house price growth is very low at this stage largely as a result of the state of consumer finances,” says Du Toit.

He says household debt to disposable income is still relatively high at almost 77 percent. Many consumers are struggling with bad debt making it difficult for them to obtain credit.

Du Toit reckons the property market will continue to reflect economic and consumer finance conditions.

“I expect very low nominal price growth for 2011 with house prices expected to drop in real terms this year,” says Du Toit.

It appears that the global housing market continues to be somewhat in the doldrums and this seems likely to continue for the foreseeable future, says Dr Andrew Golding, chief executive officer of Pam Golding Properties.

Aerial view of Umhlanga coastline: Elwyn Schenk, Pam Golding Properties area principal in Umhlanga, KwaZulu-Natal says this market is resilient. Its wide appeal and strong commercial growth has attracted those moving in from other areas in the Durban surrounds. Home buyers are a mix of end users and investors across all sectors of the market.

“Our housing market started to turn down almost a year before the start of the global economic downturn and we have been in this down cycle for the best part of four years,” says Dr Golding.

He says the residential property market has held up relatively well from a pricing point of view with prices (generally) only between 10 and 20 percent down off the peak at the height of the cycle.

“The market remains subdued but resilient and this status quo is likely to remain for at least the rest of 2011 and possibly well into 2012.”

Dr Golding says they are seeing an increase in sales numbers and activity levels but the upward trend is slow rather than a rapid recovery.

He adds that key to the faster improvement in the residential market will be a relaxation of the current stringent bank lending criteria. – Denise Mhlanga

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

The Slow Affordability adjustment continues

As the residential market stays on the weaker side of the economic spectrum.

The FNB Quarterly Housing Review focuses on the key issue of housing affordability, and why residential demand has not grown significantly despite a very significant improvement in the two "traditional" calculations of affordability that are used.

These measures are the average house price/average remuneration ratio and the installment value on a 100% loan on an average priced house/average remuneration ratio. Both of the indices reflecting these ratios have fallen (improved) dramatically since their peaks in 2007/8, the price/average remuneration ratio by -22% and the installment/average remuneration ratio by -40.4%, with interest rates providing additional downward impetus for the latter ratio.

However, these dramatically improved trends run contradictory to our FNB Estate Agent Survey results where an increasing percentage of agents (57% by the 4th quarter of 2010) are stating that income levels have got "far behind home price levels". Despite the estate agent survey question requiring only a subjective and qualitative answer, our feeling is that their answer is far closer to the mark than calculations using average price and average remuneration.

This is in part because of the major decline in formal sector employment from 2008-early-2010, according to the SARB as much as -15.4% over the period. Therefore, the average income earner may be fine, but formal income earners are significantly less in number compared with a few years ago.

However, the issue is more complex than that, because the question has arisen as to how come the likes of new motor vehicle growth far outstrips new home sales (and thus new residential building activity growth)? The motor vehicle sector operates in the same economy as the home market, and is also affected by issues such as recession and job loss. But new motor vehicle sales growth was robust through 2010 to early-2011 (as were retail sales), while the also interest rate-driven new housing demand (and thus building activity) remains virtually in freefall.

Here, the concept of "relative affordability" comes into play to partly explain the differing performances. During the last decade, prior to the recession, both the housing market and the vehicle market had huge demand booms, driven largely by a dramatic reduction in the cost of credit, a healthy economic and household income growth rate, and a far lower household sector level of indebtedness than today.

However, the boom time rate of increase in house prices far outstripped that of vehicle sales due to a far greater limit in the supply of new homes to the market. The more severe supply constraint in the housing market is due to building sector constraints, whereas vehicles can be imported rapidly rendering the supply thereof virtually unlimited for a small economy such as our own.

The result was that house affordability (price relative to income/remuneration) deteriorated far worse during the boom than was the case for motor vehicles, with vehicle affordability actually improving over the whole decade. This relative affordability deterioration in housing alone must surely have an impact on the relative performances of housing demand versus vehicle demand.

However, the possible reasons go even further. While many people think of home ownership as an essential item, the reality is that for the middle class it is not always essential in the short term. Or, at least, it is not always as essential as vehicles. By this we mean that would-be new entrants to the home market can often rent, or alternatively, delay their entry into property by remaining in their parents home for longer than perhaps originally planned.

Mobility, however, is extremely important in the middle to upper income job market, and good public transport is not yet a reality. Private vehicles are thus arguably a more essential middle class item than owning a home.

Motor vehicles also have a shorter lifecycle than houses, meaning a shorter time to replacement. Therefore, one would expect this, too, to cause a more prompt recovery in vehicle demand once economic conditions improve or interest rates fall.

Back to affordability issues, and one must not rule out the impact of rates and utilities tariffs related to housing. These have climbed steeply in recent times, and the multi-year Eskom tariff hikes mean more of the same in 2011 and 2012, outstripping private vehicle related cost increases. Electricity tariff hikes are most prominent in this regard, but assessment rates and water are not far behind.

Finally, with regard to access to finance, it probably wouldn't even be necessary for home loans banks to have tighter credit criteria than vehicle financiers in order to have a bigger negative impact on their market. The large value of a home purchase relative to car purchases (on average) mean that a 10% hypothetical deposit on a motor vehicle purchase would be manageable for more people than a 10% deposit on a house.

Therefore, SA's severe lack of savings militates far more against a big ticket item such as a home purchase than against items where smaller loans are required.

So, the affordability deterioration of housing relative to both vehicles and overall consumer goods and services (including the relative affordability deterioration contribution of big rates and tariff hikes), over the last decade as a whole, should imply the need for the household sector to re-balance its expenditure basket by reducing the portion spent on housing relative to other items. Many would-be new entrants can do this in the short term, due to the less essential nature of middle class home ownership relative to reliable motor vehicles.

Hence, the ongoing decline in new residential building completions in 2010 in stark contrast to sharp growth in new motor vehicle sales. This re-balancing of the household sector expenditure portfolio, along with very weak job creation further hampering new entries to a market that still appears to be oversupplied, and given our expectation of no further interest rate cuts in 2011, leads us to the expectation of mild average house price deflation in 2011. We pencil in an FNB House Price Index decline of around -1%.

While there are no obvious indications of any significant stimulus for the market in 2011, at this stage there are fortunately no obvious indications of any sharp shock to the market either, just a very "flat" and unexciting year. Any "unexpected" shocks to upset the apple cart would probably emanate from foreign sources.

What happens to the US economy after their huge stimulus measures wear off? Do capital inflows into SA reverse sharply, causing a sharp currency weakening and an inflation surge? Do global food and oil prices "spike" again? For the time being, though, the 2011 environment appears fairly benign, but with gradually increasing upward pressure on inflation, which in turn is expected to lead to interest rate hikes from early 2012.

Property recovery still '12 to 18 months off'

The residential property market in South Africa is still coming to terms with the fallout from the economic crisis, said Auction Alliance CEO Rael Levitt on Monday.

According to SA's largest auction group, sales trading activity is increasing as home buyers take advantage of a slower recovery.

"South Africans are now seeing a repeat of the lengthy property downturn last experienced in the early 1990's. Opportunistic buyers are finding great deals which is boosting trading volume.

"What is unique about this property contraction is that low values are coinciding with low interest rates. It's thus bargain hunting season for those with access to funding," says Levitt.
According to Levitt, the outlook for the second half of 2010 is flat.

The world cup has been a great shot in the arm for local tourism and retail trading but a full property recovery is still 12-18 months off, even in a reasonable interest rate environment and even with reasonable market stability, says Levitt.

"Those who were expecting the South African real estate market to quickly recover in the second half of 2010, after the world cup, may be in for a long wait."
Alliance is predicting a flat real estate market with no increase in value through December 2010.
This is echoed by Absa senior property analyst, Jacques Du Toit, who says that year-on-year growth in house prices may peak soon.

Du Toit says house prices rose by 14,8% year-on-year last month and that Absa was forecasting slower growth at 8% to 9% until the end of this year.

Levitt concurs with this view and believes that from the beginning of next year prices are projected to increase at a stronger rate.

"Depending on global macro-economic trends we could end up running through a strong cycle only next year," warns Levitt, adding that a property contraction can last for several years and house values could move up more strongly or more weakly, depending on any number of circumstances."

"Certain sectors in the residential property market, such as leisure property, new property developments and vacant land sales may weaken over the next six months as a delayed pipeline of distressed properties begins to liquidate," says Levitt.

"Signs of stabilisation and growth in over supplied sectors cannot be hailed as part of a recovery and may soon recede as an overhang of the shadow inventory of distressed properties waits to enter the market."

The general outlook that the housing market has finally bottomed may well be "premature" optimism.

The single largest impediment to a recovery in the housing market is the large number of loans that are either in a delinquent status or are destined to liquidate.

"We have seen a slowdown in the number of distressed properties hitting the market, but this doesn't mean that the banks have not been developing a pipeline of future delinquencies due to clients who were assisted with short term bond relief.

"One must remember that many banks have assisted their debtors reschedule debt, but if property price inflation levels off for the next 6 months, these debtors will have to start normalising their loans," Levitt added.

"The distressed backlog is due to a longer timeline for loan foreclosures in South Africa", explains Levitt.

"In other words, loans continue to transition into the delinquency pipeline at a rapid pace, but are moving out at a very slow pace."

He said that many distressed loans are "destined to liquidate" and will impact on the recovery but at the same time allow cash-flush buyers the ability to go bargain hunting over the next few months.

"We are concerned that, in light of this housing overhang, the stabilisation we have seen in home prices the last few months is temporary," says Levitt.

"That said, there is a window of opportunity for investors to get into a cheap market that will recover in the medium and long term."

Source: I-Net Bridge