How low can they go?
House prices set to get worse before they get better
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.