SA mar­ket stays flat, says ex­pert

Prop­erty pro­fes­sion­als com­ment on real es­tate trends around the globe, writes Anna-marie Smith

Business Day - Home Front - - HOMEFRONT -

WHILE econ­o­mists are heed­ing cau­tion amid gloomy for­eign eco­nomic con­di­tions, prop­erty pro­fes­sion­als as­sess his­toric and cur­rent mar­ket trends lo­cally and in the US.

FNB’s July house price in­dex re­ports that SA’s prop­erty in­dus­try, while show­ing slow re­cov­ery pat­terns, is likely to ex­pe­ri­ence pres­sure re­sult­ing from world’s big­gest econ­omy, the US, and the Euro­pean economies, com­ing un­der pres­sure.

FNB Home Loans prop­erty strate­gist John Loos said last week: “Look­ing ahead to the end of this year and into next year we con­tinue to an­tic­i­pate a very flat res­i­den­tial prop­erty mar­ket.”

Al­though the FNB house price in­dex shows mild ac­cel­er­a­tion in its year-on-year growth rate in re­cent months, the July 2011 eco­nomic in­di­ca­tors show in­creased pres­sure on the res­i­den­tial mar­ket in the near term.

The re­port shows that the July growth rate moved to 4,6%, the high­est rate of growth since Au­gust last year, which was at 3,1% in June 2010.

High­light­ing the ef­fects of in­ter­est-rate cuts, FNB re­ports that mild ac­cel­er­a­tion in the yearon-year growth rate in house prices in July is be­lieved to be largely the lagged im­pact of slightly stronger de­mand dur­ing the sum­mer quar­ters as a re­sult of late-2010 in­ter­est-rate cuts.

Real es­tate ex­perts say the US Fed­eral Re­serve’s re­cent un­der­tak­ing to fix in­ter­est rates at 1% for the next two years will of­fer some respite against a pos­si­ble dou­ble dip in the global econ­omy.

US in­ter­est rates were not the cause of its prop­erty woes but rather the Fed­eral Re­serve’s ir­re­spon­si­ble re­lax­ation of strin­gent lend­ing cri­te­ria poli­cies, says prop­erty ex­pert Steve Mur­ray, of Real Trends in the US.

He was guest pre­sen­ter at RE/MAX Prop­er­ties’ con­fer­ence in Cape Town last week.

He says: “While hold­ing in­ter­est rates for two years will im­prove mar­ket re­cov­ery op­por­tu­ni­ties, what caused the col­lapse of the US prop­erty mar­ket was the Fed­eral Re­serve’s loos­en­ing of strin­gent un­der­writ­ing lend­ing poli­cies, orig­i­nally put in place 50 years ago for the very pur­poses of pre­vent­ing a mar­ket col­lapse.”

He says the con­cept that own­ing a home is a good thing led to low-in­come fam­i­lies buy­ing homes with 100% mort­gages. This lead to the fa­mous NINJA mort­gage plan of no in­come, no job, no as­set, as did an­other ex­otic lend­ing plan, ALT-A Mort­gage, with loan re-pay­ments not be­ing re­called for two years, and in­ter­est only be­com­ing payable in year three, on the as­sump­tion of a mar- ket re­cov­ery and en­su­ing prof­its.

Real Trends re­search shows sim­i­lar trends in 16 other coun­tries, in­clud­ing Spain, Por­tu­gal, Greece, Italy, Ire­land, China and most of Europe.

Mur­ray says the high num­ber of US buy­ers who should never have been al­lowed to own homes is seen in cur­rent sales of new and ex­ist­ing homes at about 5,3-mil­lion to 5,4-mil­lion, com­pared with sales at the height of the prop­erty boom in 2005 of 8,4-mil­lion and 9mil­lion in 2006.

He says while US prop­erty prices are still head­ing down­wards, for the first time in six years unit sales in July this year are up by about 5% com­pared with the same pe­riod last year, pos­si­bly re­sult­ing from the fed­eral gov­ern­ment’s re­cent in­tro­duc­tion of tax cred­its, pro­vid­ing more dis­pos­able in­come for prop­erty in­vest­ments.

With un­em­ploy­ment at 9,2%, cur­rent pre­dic­tions are for a slow re­cov­ery of the US prop­erty mar­ket, es­ti­mated to be up by about 3% for this year. Mar­ket trends show in­vestors be­ing lured into buy­ing smaller, sin­gle homes for rental to non-own­ing fam­i­lies. The US con­struc­tion sec­tor is be­ing stim­u­lated by high de­mand for apart­ment ac­com­mo­da­tion.

Ac­cord­ing to the FNB prop­erty barom­e­ter, lo­cal mar­ket trends re­flect sim­i­larly in SA’s low­er­in­come seg­ment, which has shown im­proved price growth since early last year. This year’s sec­ond quar­ter seg­ment house price and mar­ket strength re­port in­di­cates that on a year-on-year ba­sis, in affordable ar­eas where house prices av­er­age R376 974, av­er­age prices grew by 7,4% and in mid­dle-in­come ar­eas where prices av­er­age R724 136 av­er­age prices grew by 5,7%.

Dur­ing the same pe­riod, smaller prop­er­ties av­er­ag­ing R412 994 recorded the best year-on-year price growth of +3,3%.

There is a trend to ad­dress gap ar­eas in hous­ing mar­kets such as the affordable hous­ing sec­tor.

Sim­i­lar to SA’s Depart­ment of Hous­ing and Set­tle­ments’ in­tro­duc­tion next year of an in­surance back-up for banks’ lend­ing to low­in­come earn­ers, the US Fed­eral Hous­ing Ad­min­is­tra­tion has in­tro­duced mort­gage in­surance. This in­surance only ap­plies to ap­proved build­ing struc­tures with sound elec­tri­cal and wa­ter in­stal­la­tions, while in­surance funds are ac­crued from bank loan charges and lend­ing fees.

An­other US state mea­sure to boost affordable hous­ing is a rental sub­sidy sys­tem for those able to prove fi­nan­cially sta­bil­ity. They qual­ify for rentals to be de­ducted from the pur­chase price, lead­ing to an in­crease in the num­ber of home own­ers with­out caus­ing mar­ket dis­tress.

Home sweet home will prob­a­bly re­main just that as prop­erty prices are ex­pected to re­main un­der pres­sure, with lit­tle prospect of boom con­di­tions re­turn­ing in SA or world­wide, ac­cord­ing to a num­ber of prop­erty pro­fes­sion­als.

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