Property Prices still dropping
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| Property Prices still dropping |
| What is the latest? Standard Bank’s property book for the first half of 2009 showed an average monthly decline of 3.3% in the median house price. The trend cycle of the June data confirmed that there is still no light at the end of the tunnel and that the weakness in the property market is set to continue. The June smoothed rate yielded a steeper rate of contraction of -4.9% compared to a year ago relative to 4.1% in May. In real terms, using our estimate of the CPI in June to deflate the nominal house price, the decline in real house prices comes to approximately 12%. The smoothed growth rate for June shows that the value of the median residential properties financed by Standard Bank was R523 000. The overall growth in the economy, the level of household income and household debt, as well as the medium-term outlook, are such that a clear and quick improvement in the housing market is unlikely. We have highlighted in previous releases that the house price contraction has been aggravated by industry-wide loan-to-value restrictions. We have to highlight that any easing in credit granting criteria will be mild, as risks continue to lie on the upside in so far as job security and income growth is concerned. This will make for a mild recovery in the property market, which is unlikely to gather traction this year. Figure 1: Standard Bank’s residential property loan book: smoothed median price growth The macroeconomic backdrop remains constrained. The global financial crisis gathered momentum in the latter part of 2008 and spread from the credit and financial markets to the real economies. With the World Bank predicting that the global economy will contract by 2.9% in 2009, it is clear that South African exports will not remain unharmed by these developments, thus impacting on the performance of the wider South African economy. The international economic environment remains particularly uncertain. There is no agreement where the global economy is heading, with the developed world experiencing its worst recession in almost 80 years and many emerging markets likely to report negative growth. The overall consensus seems to suggest that at best only the second half of next year may see a meaningful improvement in global conditions. Locally, the last half of 2008 showed large sections of the economy under stress. Things got much worse in the first quarter of the year, with the slump in GDP growth reaching -6.4% (q/q s.a.a.), the worst since 1984. Troublingly, the contraction was broad-based among the sectors, suggesting that the economic recovery will be slow and difficult. Preliminary evidence from economic indicators points to a poor start to Q2 GDP, with manufacturing production, mining production, vehicle sales, port throughput, building plans passed and corporate liquidations signalling further weakness. Clearly, a quick turnaround in economic fortunes is also not on the cards. According to Statistics South Africa (Stats SA) 179 000 jobs were lost in the first quarter of this year in the formal non-agricultural sector relative to the previous quarter, following 22 000 jobs created in Q4 2008. Jobs in the formal sector of the economy were lost in trade, manufacturing, construction and financial sectors of the economy. Furthermore, economic growth is expected to contract by between 1% and 2% in 2009 from growth of 3.1% in 2009. The employment crisis is likely to be prolonged in the current economic downturn. With employment a fundamental driver of the housing market, the market will remain in the doldrums when unemployment is on the increase. A decline of 4.9% in real household consumption expenditure was reported for Q1 2009. Consumers’ cut back in spending should be viewed against the backdrop of a steep decline in real personal disposable income of households of 4.5% in the quarter. Without a doubt, the contraction in real disposable income growth was the result of a sharp decline in bonus payments, operating hours, job layoffs and lower property income – a trend that is likely to endure for at least another six months. Moreover, the household debt-to-disposable income ratio rose marginally to 76.7% from 76.3% in the last quarter of 2008, implying that financial strain on households remained elevated in the quarter. Household saving as a ratio of disposable income increased slightly in Q4, but remains in negative territory. We anticipate the household debt de-gearing process to remain tardy owing to the aforementioned countervailing forces. However, consolidation of debt should gain traction during the second half of the year, when the debt service cost-to-income ratio falls below 8% from its current level of 10.9%, while lower inflation will further free up some cash. We expect the debt servicing ratio to ease to around 8.5% in Q2 owing to the recent reductions in interest rates. Whereas consumer confidence edged up slightly to 4 index points in Q2 from 1 in Q1, the rating of the appropriate time to buy durable goods declined further to -21 in Q2 from -11 in Q1. Consumers are seemingly becoming financially more conservative, which suggests that they are more inclined to build precautionary savings. Under these circumstances, the platform for establishing stability in house prices will continue to be weak. Growth in private sector credit extension (PSCE) decelerated more speedily in May to 5.7% y/y from 8.5% y/y in April. Mortgage advances increased (surprisingly) by R0.207bn, albeit still one of the lowest readings over the past few years. On an annual basis, however, this translates into a deceleration in growth to 9.4% in May from 10.6% in April. On the monetary policy front it now appears that downward phase of the interest rate cycle has come to an end. The 450 basis points cuts over the last six months, however, will still have to filter through the economy. The full impact of interest rate cuts on economic growth could take as long as twelve- to eighteen months. Despite the positive news that a moderation in inflation brings, inflation tend to be sticky in a downward direction, complicating the task of the Reserve Bank. Further sharp increases of the order of 31% in electricity tariffs and possibly in the price of oil are in the pipeline for the next few years. This will put upward pressure on inflation and interest rates. What are the risks to the property market? It is highly unlikely that the housing market will flourish when the economy is under such strain as it is currently. As noted earlier, the outlook for the economy over the short term remains bleak. Statistics are still reflecting a rising number of insolvencies and liquidations and banks have reported significant increases in bad debt. Households currently owe banks an astounding R1.2 trillion, of which the greater part (82%) represents mortgage advances. Furthermore, about a third of South Africans with impaired credit records are more than three months in arrears. With house prices still declining, the wealth base of households is compromised, putting further strain on households. Outlook: The Standard Bank median house price index (smoothed) decreased by 4.9% y/y in June, following on average declines of 3.3% y/y in the first five months of the year. Over the short term, the economic outlook, as a crucial driver of the housing market, is expected to deteriorate further; however, relatively positive developments on the inflation front and the full impact of interest rate cut will in due course support the property market. It is anticipated that house price growth will be negative over the short- and medium term, but likely to bottom out towards the end of the year as the effect of interest rate cuts filter through the economy and the property market. The way in which house prices are measured means that they are inherently volatile, not unlike many other economic indicators. Measuring house prices is complicated by the fact that the available data usually stem from the properties sold during a particular period, rather than from a well-designed sample that is representative of all houses. This is aggravated by the heterogeneity of houses. Changes in the measured prices may be the result of actual changes in the general price level; or changes in the distribution of the houses being sold, for example more sales of luxury houses may push up the measured house prices even without changes in general prices; or the changes may simply be random. Given these data challenges, the international best practice is to use the median or middle price, rather than, say, the average house price. The median is the price such that half of all houses are more expensive and half less expensive than that price. It is substantially less volatile and less sensitive to the typical problems found in house price data. Standard Bank’s data are therefore based on the median house price of the full spectrum of houses. Furthermore, national data from the Deeds Office are available only with a relatively long lag of up to nine months, so data from Standard Bank, which has a market share of about 27.7%, and whose data are generally highly correlated with those of the Deeds Office, are a good proxy for the national market |
