How low can they go?

House prices set to get worse be­fore they get bet­ter

Finweek English Edition - - Openers - JOAN MULLER

IT’S BE­COM­ING IN­CREAS­INGLY clear a hous­ing re­cov­ery is still a long way off. Data re­leased by South African banks last week point to fur­ther pres­sure on house prices over the next 12 months. Stan­dard Bank’s monthly prop­erty in­dex re­ported me­dian house prices drop­ping by 2,5% in Oc­to­ber. While First Na­tional Bank’s in­dex was still in pos­i­tive ter­ri­tory in Oc­to­ber, with over­all growth of 1,1%, the bank’s data show prices are in­deed al­ready tum­bling in some sub-sec­tors of the mar­ket. For ex­am­ple, prices of smaller homes (two or fewer bed­rooms) dropped nearly 12% in the third quar­ter (year-on-year).

FNB prop­erty strate­gist John Loos says the drop in prices of cheaper prop­er­ties is in­dica­tive of the se­vere fi­nan­cial strain be­ing ex­pe­ri­enced in lower in­come house­holds. Loos sus­pects house price trends over­all, as in­di­cated by FNB’s in­dex, don’t re­flect the full ex­tent of cur­rent mar­ket weak­ness. He says that’s be­cause most prop­erty own­ers aren’t forced to sell their homes so trad­ing vol­umes are much thin­ner, mak­ing true com­par­a­tive analy­ses dif­fi­cult.

Loos ex­pects SA’s hous­ing slump to get worse be­fore it gets bet­ter. Says Loos: “The risks have shifted away from inflation and in­ter­est rates to­wards eco­nomic growth.” He says it’s still un­cer­tain how the global fi­nan­cial credit cri­sis will play it­self out or whether there’s more bad news to come. “That un­cer­tainty will prob­a­bly en­cour­age SA’s banks to go cau­tiously, plac­ing con­tin­ued pres­sure on hous­ing de­mand and prices un­til mid-2009.”

Stan­dard Bank econ­o­mist Jo­han Botha agrees that even if in­ter­est rates start de­clin­ing by sec­ond quar­ter 2009, SA’s hous­ing mar­ket is likely to re­main in the dol­drums un­til late 2009 or early 2010. “House­holds may first want to nor­malise their per­sonal fi­nances be­fore tak­ing on new debt.”

SA’s prop­erty play­ers are loath to make pre­dic­tions on how much fur­ther house prices are likely to fall. Most ex­pect an av­er­age drop of not more than 10% to 15% by mid- 2009 on an an­nu­alised ba­sis – but nowhere near the fall of more than 40% ex­pected in many mar­kets off­shore.

In­ter­na­tional re­search group Cap­i­tal Eco­nomics says house prices in Bri­tain, Ire­land, Spain and Aus­tralia would have to fall by 41%, 48%, 42% and 43% re­spec­tively (from their 2007 peaks) to re­store prop­erty val­u­a­tions in those coun­tries to long-term trends.

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