Housing market to face downward correction
Real prices will be towards levels more reflective of a weak economy, says FNB
THE HOUSING market was expected to experience a gradual broad downward correction in real terms over the next 10 years, according to FNB.
John Loos, a FNB property strategist, said yesterday it was unlikely the residential property market would be able to escape negative economic events indefinitely and the correction in real prices would be towards levels more reflective of a weak economy.
“This means house prices could still inflate but at slower rates than consumer price inflation over much of the period,” he said.
However, Loos expected the correction to be gradual, stressing the likelihood of a sharp shock to the property market was “significantly less today than back in 2008” because of significant global investment in energy production capacity.
In addition, Loos said the domestic household sector had lowered its vulnerability, with the debt-to-disposable income ratio at a lower level at around 73 percent from a peak of 83 percent in 2009.
Loos said he supported the consumer price index (CPI) targeting regime but urged the SA Reserve Bank to keep an eye on household indebtedness and set interest rates at levels that encouraged a further decline in the debt-to-disposable income ratio and at a level appropriate to prevent the housing market from becoming “overheated” on such a grand scale again.
Loos said the past 10 years in the residential property sector had been a roller-coaster ride of “boom, bust and then sanity”. He did not believe the “bubble” ever completely burst or that the residential market had completed its post-boom “downward price correction”.
Loos said current real house price levels were still relatively high by historic standards despite some correction around 2008/09 and at levels that still largely seemed to reflect the 5 percent plus growth economy the market had at the height of the property boom.
However, Loos said South Africa had been a lowly 1.9 percent a year growth economy over the past five years and there were few major positive structural changes in the offing that could boost economic growth in the foresee- able future.
“South Africa has entered a period of heightened social and political tension. This manifests in significantly higher levels of disruptive strike action and service delivery protest.
“This is the start of the gradual move towards the next major political realignment and this is likely to be a turbulent process.
“The country’s inability to meaningfully raise its productive capacity is contributing to a wide current account deficit on the balance of payments and factors such as these contribute to ratings downgrades, heightened investor jitters and pressure on the rand,” he said.
But Loos still expected mildly stronger house price growth next year than recent house price growth, with significant supply constraints still supporting house price growth until higher levels of building activity ultimately kicked in.
Although Loos said the property market would remain an exciting place to be for the next decade because of a greater focus on urban planning issues.
These included the redesign of the country’s cities to bring more of the economy and job creation to the largely “dormitory town” former black townships, linking township areas to the suburbs and existing business nodes with public corridors, and densification along public transport corridors.