All fall down
Despite aggressive interest rate cuts, house prices could decrease by as much as 20% in some areas
ý SA’S R5.7-trillion housing market is heading for what could be the biggest drop in prices and sales volumes on record. Data analytics group Lightstone last week warned that average house prices (in all price categories) could sink by up to 14.5% by year-end.
Leafier suburbs, where properties typically trade for more than R3m, will be hardest hit, with prices potentially declining by up to 19% by the fourth quarter. That far outweighs the fall of about 5% in luxury house prices recorded during SA’S previous housing recession, in 2008/2009, and equates to a hefty R950,000 knock on a R5m property.
Lightstone analytics director Paul-roux De Kock says these house price forecasts are based on a scenario that assumes a coronavirus-induced GDP contraction of 10% this year. If the economy shrinks by only 3%, overall house prices could drop by 3.9% while the luxury segment could show a fall of 6%.
LUXURY SEGMENT (>R3m)
According to Lightstone, properties in the R3m-plus category represent 21% (by value) of SA’S total housing stock, worth an estimated R5.7-trillion. Another
45% of SA’S existing housing stock falls in the R1m-r3m bracket, while the rest (38%) is priced below R1m.
FNB economist Siphamandla Mkhwanazi expects prices as a whole to decline by a slightly more palatable 5% this year, down from positive growth of 3.5% in 2019.
But he has an equally bearish view on the higher end of the market. In the R1.8m-r3.5m bracket, he has pencilled in a 10%-15% decline as a base case for the year, while suburbs with prices exceeding R3.5m could record falls of more than
20% in some cases, he says.
More worrying is Mkhwanazi’s forecast of a 45% drop in the number of houses likely to be sold this year. Since the government imposed a lockdown on nonessential businesses (including the deeds office) from March 27, housing sales have virtually ground to a halt. If Mkhwanazi’s sales volume predictions materialise, total annual housing sales will drop from roughly 300,000 a year for the past 10 years to about 165,000 for 2020.
While it is difficult to predict exactly where prices and sales volumes will end this year given uncertainty about the impact of
Covid-19 on the economy, one thing seems certain: this year’s housing recession is likely to be far more pronounced than the drop following the 2008 crisis.
Back then prices fell by no more than 1.5% on average, according to FNB.
The previous recession was also relatively short lived, with prices returning to positive growth territory within 14 months.
Mkhwanazi expects a deeper contraction this time around because of the pandemic’s impact on labour markets.
Moreover, he says a recovery will likely be drawn out given already stretched pre-covid-19 household balance sheets and high unemployment levels.
Though price pressure will be felt across all segments, Mkhwanazi says the higher and luxury markets will take the most pain due to an existing oversupply of stock amid dwindling demand and depressed consumer sentiment. But he suggests that sharp price falls may be averted if sellers can afford to stay put until the Covid-19 wave is over. “If there are no sales and no market, properties hold their value,” he says.
Mkhwanazi expects the affordable market below R1m to be the most resilient, with demand likely to be propped up by cheaper prices, lower transfer duties and historically low interest rates — the Reserve Bank cut the repo rate by a further 50 basis points last week, the fourth cut in 2020.
This year’s reduction of 2.75 basis points in total provides a considerable savings of about R1,700 a month on a R1m home loan (repaid over 20 years).
Demand at this end will also be supplemented partly by middleincome families buying down, which is a common trend in weak economic environments.
De Kock agrees that first-time buyers are likely to enter the market first.
But there is a caveat: “How quickly sales and prices recover will depend on how many people lose their jobs over the coming months. If SA’S unemployment level rises to 50%, as some predict, less experienced, younger people are likely to struggle most to find jobs and simply won’t be able to afford home ownership, despite recent rate cuts.”
Meanwhile, industry players continue to urge the government to lift the trading restrictions on estate agents. They are still not sure when physical viewings of properties will be allowed again, which makes it near impossible to conclude sales.
As Lew Geffen Sotheby’s International Realty CEO Yael Geffen puts it: “If the government doesn’t open more economic doors now, such as allowing trade in the real estate sector, which has a valuechain GDP contribution of 6%, there eventually won’t be a country left to save.”