Head­ing for a melt­down?

A re­bound seems more likely

Finweek English Edition - - Property - JOAN MULLER

IS THE LONG-AWAITED drop in house prices fi­nally on the hori­zon? The ques­tion is pop­ping up in­creas­ingly amid grow­ing con­cerns of mount­ing mort­gage debt (in South Africa and over­seas) and house prices that some be­lieve have in­creased too far too fast.

The big worry is that SA home­own­ers, like many of their US coun­ter­parts, could soon find them­selves in the dreaded neg­a­tive eq­uity sit­u­a­tion – when your mort­gage debt ex­ceeds the mar­ket value of your house. That usu­ally oc­curs when in­ter­est rates rise, prop­erty prices fall and home­own­ers start de­fault­ing on their mort­gage re­pay­ments. Such a sce­nario was ev­i­dent in SA in the late Nineties af­ter in­ter­est rates shot up to 25%.

How­ever, data re­leased in re­cent weeks by SA’s banks and other hous­ing com­men­ta­tors sug­gest that the chances of house prices fall­ing (in nom­i­nal or even real terms) any­time soon are highly un­likely.

In fact, economists have been sur­prised by how buoy­ant hous­ing sales and price growth still are, prompt­ing some to up­grade their growth fore­casts for 2007. Both Jac­ques du Toit (Absa) and John Loos (FNB) no longer ex­pect house price growth to dip be­low 10% this year. Absa’s latest monthly house price in­dex al­ready points to an ac­cel­er­a­tion in house price growth since the be­gin­ning of this year, with an av­er­age 15,4% growth in Fe­bru­ary (year-onyear), up from 14% in fourth quar­ter 2006.

Loos, FNB’s prop­erty strate­gist, says the lag ef­fect of last year’s four con­sec­u­tive in­ter­est rate hikes may still dampen hous­ing ac­tiv­ity, with growth bot­tom­ing at around 12% this year. How­ever, prices could start ac­cel­er­at­ing again in 2008, steadily ris­ing to 18% by 2010. Loos says his fore­cast may even prove too con­ser­va­tive.

His bullish out­look is based on es­ca­lat­ing build­ing costs and a grow­ing land scarcity that will con­tinue to drive house prices up. Says Loos: “Peo­ple don’t seem to ap­pre­ci­ate the ex­tent that SA’s 5% growth econ­omy is push­ing de­mand for hous­ing from a fast-grow­ing mid­dle in­come class. And we have a con­struc­tion sec­tor that just can’t sup­ply that de­mand quickly enough.’’

Loos doesn’t see sup­ply catch­ing up with de­mand for at least an­other four years, given that SA’s lim­ited pool of build­ing re­sources is likely to be al­lo­cated in­creas­ingly to in­fra­struc­ture and com­mer­cial prop­erty de­vel­op­ment in the run-up to the 2010 Soc­cer World Cup.

Then there’s the ar­gu­ment that SA house prices still need to play catch-up with in­ter­na­tional mar­kets. Loos also be­lieves that the ex­tent of SA house­holds’ in­debt­ed­ness is ex­ag­ger­ated.

A re­cent study com­mis­sioned by the na­tional credit reg­u­la­tor sup­ports Loos’s view. Na­tional credit reg­u­la­tor Gabriel Davel was re­ported in Busi­ness Day as say­ing that though ar­rears have started tick­ing up “there’s noth­ing that in­di­cates a debt cri­sis”.

Stan­dard Bank se­nior econ­o­mist Elna Mool­man agrees. “House­hold debt lev­els as a per­cent­age of in­come may be at a record high 73%, but debt re­pay­ment to in­come ra­tios re­main well be­low his­tor­i­cal peaks.’’

Mool­man ar­gues that home­own­ers ac­tu­ally have scope to bor­row more, es­pe­cially if you con­sider that SA mort­gage debt as a per­cent­age of dis­pos­able in­come is still at a “com­fort­able” 40% com­pared with 78% in the US, 120% in Aus­tralia and 105% in Bri­tain.

It isn’t just the SA hous­ing mar­ket that re­mains sur­pris­ingly lively. Other in­ter­na­tional prop­erty mar­kets are also de­fy­ing wide­spread ex­pec­ta­tions of a global melt­down. Ac­cord­ing to a re­port in the latest is­sue of US mag­a­zine Newsweek (19 March), the long-awaited drop in house prices world­wide has yet to hap­pen. It re­ported that while av­er­age house prices in the US may be de­cel­er­at­ing, many ma­jor cities world­wide are ex­pe­ri­enc­ing a re­bound in prices.

Newsweek re­ports that though in­ter­est rates are start­ing to creep up world­wide, they’re still hov­er­ing at his­toric lows of be­tween 5% and 6%. “This, cou­pled with strong and in some in­stances spec­tac­u­lar house price growth in many parts of the world, makes a global prop­erty crash un­likely.’’

Says Na­ri­man Behravesh, chief econ­o­mist at the Mas­sachusetts-based eco­nomic fore­cast­ing and con­sult­ing firm Global In­sight: “As long as in­ter­est rates re­main low, you’ll see a hous­ing re­cov­ery and then a reac­cel­er­a­tion.”

That seems to be very much in line with what an­a­lysts here are pre­dict­ing for the hous­ing mar­ket in SA.

House price growth shouldn’t dip be­low 10% this year. Jac­ques du Toit

HOUSE PRICES... READY FOR NEXT RALLY?

Source: Absa

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