Home buying expected to take turn for worse

20 June 2017

South Africa's credit rating downgrade and the current economic downturn and the current economic downturn is slowly starting to impact the country's property market, with house price growth and levels of home buying expected to soon take a turn for the worse.

At present the property market is continuing to perform as normal, but financial professionals warn about a lag between changed economic states and property market performance.

Erwin Rode, CEO of Rode & Associates, believes the country's poor economic performacne will eventually impact on the growth in housing prices and the rentals that households can afford.

He adds, however, that Cape Town is the exception as house prices are still growing at double-digit figures compared to the rest of the country, which are about 2 points below inflation or worse.

There seems to be consensus that this can be ascribed to 'semigration' from up-country. Confirmation of this hypothesis can be seen in the traffic in Cape Town, which has become worse than traffic in Joburg."

Apart from Cape Town, Rode expects house prices to grow at less than the inflation rate for many years, which will make a house financed by a high mortgage bond a poor investment.

Explaining the reasons for pessimism regarding the growth in house prices, he explains that, firstly, house prices are still "very high" in real terms and have lots of potential to gradually decline in real terms, and, secondly, that South Africa's economy is "now on a low growth path".

"This means the current recessionary conditions are not a normal cyclical affair with a sharp recovery thereafter.

"Rather, it should be seen as a structural malaise which will restrict growth in the long term. Inevitably, all types of investments, including all types of property, will be negatively affected by such an outcome."

Much of this is echoed by FNB's household and property sector strategist, John Loos, who emphasises that although the bank is seeing an increase in home loan volumes, there is also "quite a time lag" from when people first start viewing potential homes to when they submit their home loan applications.

Up until the first quarter of 2017 at least, he says signs of economic improvement, along with mild residential market improvement, were showing.

More recently, however, the much- publicised ratings agency downgrades may have dampened sentiment in April/May to date.

If this is the case, Loos says the bank may soon feel it in its own home loan application numbers.

But only time will tell because, so far, there are no widespread signs of panic selling or huge increases in financial stress. Sentiment though, is "not overly positive", and there has been a mild increase in the percentage of sellers selling in order to emigrate, from a low of 2% at the end of 2013 to 6.2% by the first quarter of 2017.

"In short, we see a market where sentiment certainly isn't wonderful outside of the Western Cape - although it is slowing there too now, and low house price growth and the market as a whole has not had much transaction growth for some time.

"To date we have experienced a weak but relatively calm market, but it is definitely possible that the widespread publicity given to South Africa's newly acquired 'junk status' may have dampened sentiment from April onward."

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