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.

Auction Alliance CEO Rael Levitt on Monday said 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 1990s. Opportunistic buyers are finding great deals which are 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.

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 (y/y) growth in house prices may peak soon.

Du Toit says house prices rose by 14,8% year-on-year (y/y) 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 be liquidated.

"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 six 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."

John Loos, property economist at FNB, says “12 to 18 months of slowdown is not a bad guess, after 12 to 18 months of strengthening”. “I think this is the nature of the beast for a few years, i.e. shortish and mild upswings and downturns.”

“However, much depends on what happens to the global economy, and therefore our own economy. Many developed economies, including the US, are still highly vulnerable, and the risk of a double-dip global recession is a very real one.”

“Arrears and non-performing loans situation has improved considerably, but I think that it isn’t yet where we want it.”

He said estate agents surveyed in the FNB Property Barometer estimate 20% of sold properties were let go in order to downscale due to financial pressure. “That is a big improvement from above 30% at a stage in 2009, but my feeling is that 20% is still unacceptably high. I would probably describe our non-performing loans situation in the same way – significantly better but still too high.” – Eugene Brink and I-Net Bridge

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