As expected, house price growth slowed down further in August, but it is the pace of deceleration that is almost unexpected and fairly alarming.

The FNB House Price Index showed that year-on-year (y/y) price growth dropped from a revised rate of 10,1% in July to an August rate of 7,2%. It was the third successive monthly decline from a revised peak of 12,2% in May 2010.

The average house price for August was R777,491.

The usual domestic culprits are yet again putting strain on this growth rate, with the US economy casting a further ominous pall over the SA property market.

An economy in cool-off mode, still-high household debt levels, a lack of significant interest rate stimulus and base effects comprise the domestic factors impeding house growth rates.

John Loos, property economist at FNB, says the positive impact of the 5 percentage points’ worth of rate cuts from December 2008 to August 2009 has thus started to wear thin. “In addition, the household sector debt-to-disposable income ratio at 78,4% is high by our historic standards, which has prevented the household sector from responding strongly over the past 18 months to lower interest rates.”

He is also concerned with events playing themselves out in the world’s largest economy. “Massive monetary and fiscal stimulus packages in recent years have seemingly done very little to boost the US’ economy, which has been slowing in recent times. Its unemployment remains high, its consumer confidence low, and the risk of the so-called ‘double-dip’ recession must surely be seen as very high at present.”

He says all these factors have led him to revise his house price growth forecast downward, and “pencils in” some renewed decline in the FNB House Price Index in 2011 after an average projected growth rate of +6,4% in 2010.

On the bright side, the SA housing market still has a significant interest rates factor in its arsenal. “Unlike the US, where interest rates are almost zero, the South African Reserve Bank (SARB) does have ammunition in store to cushion the blow of a global economic slowdown.”

The disjuncture between demand and supply is a symptom of the prevailing problems in the residential market and the indications are that it is generally still very much a buyer’s market.

The FNB Valuers Market Strength Index, released in conjunction with the House Price Index, showed that the collective opinion of the valuers is that demand relative to supply has remained weak throughout the recent mini-recovery cycle. “It has never gotten back to anywhere near the incredibly robust levels of 2004/5 at the peak of the boom.”

The August reading of the Market Strength Index (scale of +2 to -2) was -0.137, which was virtually unchanged from the previous month’s reading. “The overall improvement in this index since its worst level of 0.177 in July 2009 has been marginal at best, and the index continues to show a very poor demand level relative to supply when compared to the best reading on record of 0,319 in February 2005.”

Related to this is the time a property is spending on the market. The FNB Estate Agent Survey showed the estimated average time of a property on the market reached 17 weeks and 1 day in the second quarter. “Oversupplies are still in abundance in many areas,” Loos said.

Meanwhile, other indices are also reporting slowing growth.

I-Net Bridge reported that Standard Bank’s median house price increased 8,3% y/y to R600,800 from a revised R597,200 in July.

The median house price increased by a further 0.6% month-on-month in August, below the average monthly increase of 1,1% recorded since the start of the year, thus signalling a loss in the monthly growth momentum.

After being in the doldrums for an extended period of time, the latest data provides confirmation that the recovery in the property market is gaining traction, Standard Bank property analyst Johan Botha said.

This improvement was not unexpected, as the low base levels in the second half of last year were set to lift growth in the second half of this year.

Also, fundamentals of the housing market are improving, reflected by higher discretionary spending. Total passenger car sales growth increased to 32,4% y/y in July from 25,8% y/y in June, and fairly solid growth in more interest rate sensitive parts of retail sales was evident, he said.

However, he also cautions that weak employment and GDP conditions, relatively poor income growth and high debt levels have contributed to both weak demand and hesitant credit supply conditions.

"The better performing property market does not suggest that the employment environment is improving sufficiently to boost property growth just yet, but the rate of deterioration in the labour market is slowing," he adds.

Moreover, households are beginning to feel slightly more comfortable with their financial positions and the extended period of relatively low interest payments on debt, together with a fall in the inflation rate, are providing for some buoyancy in real disposable income.

On the outlook, Botha says with the property market remaining relatively affordable from both an inflation and borrowing cost perspective, further improvements are envisaged in the months to come.

At the current rate of improvement and factoring in seasonal effects, the market is set to show average nominal growth of around 6% this year, and 1,2% in real terms. The outlook over the next year or so, however, remains clouded by external growth concerns, he said.

Samuel Seeff, MD of Seeff Properties, says there is a strong likelihood of a further interest rate cut. “The recent announcement that the inflation rate is at 3,7% is very promising. At an inflation rate of this level – rather than the anticipated 4% – I think that there is a strong likelihood of a further 0,5% interest rate cut, which would bring it down to 9,5%.

“We are really at the lowest interest rate for over 30 years. I can’t see anything fundamental changing significantly between now and the next Monetary Policy Committee (MPC) meeting on 9 and 10 September. So I see an interest rate cut as very likely. This would be a real psychological boost for the market and provide impetus for buyers to make a move.

“The buyers are still in the pound seats. But sellers still want 2007 prices – pre-National Credit Act (NCA) prices – and the truth is, if they want those prices, they are going to have to wait a while. However, if a seller has his property on the market at the right price, there are enough buyers out there for transactions to happen.

“Banks are currently only approving 15% of applications for 100% loans – but they are coming back and making offers to clients, for example asking for a 5% deposit. Those buyers who have at least a 5% deposit in hand are certainly much more likely to get their bond applications approved.

“I think the market will be better in September than in August. The start of Spring gets people looking at their plans for the rest of the year. I also think we will have a bit of a stronger summer than we have had for the last two years, on the back of all the positive sentiment that came out of the World Cup, the completed infrastructure and the low interest rates.

“Generally I think we are all realising here in South Africa that we may have issues which challenge us every day, but certainly the rest of the world has greater economic challenges – and our house market is likely to outperform most. So all in all, I think things will look a little more positive and turnover – if not house prices – will increase in the next few months according to the usual seasonal patterns.” – Eugene Brink

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