No sudden moves on housing, please
THE current housing market picture looks surprisingly like that of the late ’80s in South Africa, according to FNB property analyst John Loos.
A commodity price sag, a weak global economy and consumers under pressure spell a difficult time for the economy and the market.
The apartheid government was prone to quick and severe action to try to correct such trends, but the current government has fewer stimulus measures at its disposal.
Democracy in 1994 and the lifting of sanctions and boycotts allowed South Africa to kickstart its economy by normalising trade relations with the rest of the world, and over time the lowering of historically high interest rates allowed the economy to benefit from greater consumer spending. This, combined with the ability to take on more sovereign debt to spend on infrastructure, allowed the economy to grow close to 5%.
All three of these measures have run their course, with South Africa precariously balanced atop a huge pile of sovereign debt, and overindebted consumers likely to struggle with any significant interest rate rise.
Loos said privatisation of aspects of the economy to stimulate greater investor participation was the fourth lever for the government to pull, but that option did not appear to be on the table yet.
What remains is the likelihood that the Reserve Bank’s monetary policy committee will raise rates slowly and gently, which will provide the domestic residential property market with a “soft landing” and prevent an aggressive fall in nominal house prices.
What we will see is the rest of the downward correction that should have occurred immediately after the 2008 global financial crisis but had been postponed by stimulus measures that provided a flow of global liquidity to prop up asset prices. These kept South African residential property prices at artificially high real levels.
As a lender, Loos said, FNB had resigned itself to worsening bad debt in its mortgage book as interest rate increases lead to defaults, but the picture is nowhere near as bad as it could be.
If South Africa does enter a recession, bad debt may peak at 11% of the bank’s entire book, he said. But estimates for GDP growth remain slightly positive at 0.5% this year, improving marginally in 2017.
He said this had led to demand for property beginning to turn downward, but the market remains well balanced.
It currently costs a lot more to build than to buy, which has caused building plans to tail off dramatically and restricted the chance of oversupply.
Homes for sale are sitting on the market for an average of three months, which Loos thinks is fair, and speculative activity has been reduced to virtually nothing. This would limit instability, he said.
However, with households still more indebted than they should be — at around 80% of disposable income on average — a stagnant economy and a negative savings rate, the market remains in a high-risk band that could develop into a stressed market if macroeconomic factors worsen.
Currently, mortgage accounts in good standing are trending sideways — there is no obvious market stress yet.