Property Still Not Up to Scratch in SA

FNB has recently indicated that expected job losses are bound to put more pressure on the ailing South African property market. Statistics show that real house prices have dropped by nearly 10% and that a lack of affordability continues to work as a handbrake to the market.

The September FNB House Price Index was released this week and figures showed a slight year-on-year increase at 1.8%, but prices month-on-month are declining at –0.1%. Taking inflation into account, residential property values plummeted by an incredible 9.5%.

This year has seen South African consumers take a beating, with rising interest rates and skyrocketing food and fuel prices. The banks have also tightened their grip on available credit as a result of the National Credit Act, which came into force last year. This has caused a significant drop in the demand for property, as potential buyers struggle to find funding.

Estate agents have reported a dramatic decline in sales volumes and in many instances at least half of what they were in early 2007. There has been an exodus of agents from the market, with the estimate that at least 20 000 are no longer in business compared to the same time last year.

Add to the mix a surplus of sellers, thanks to political uncertainty and government incompetence around Eskom and other issues inspiring a wave of emigration and you have at the very least a buyers’ market, but also something close to a recession in that sector of the economy.

General economic growth has proven disappointing as well, which has led to a shedding of jobs – another development that FNB indicates is not good for the residential property sector. However, FNB property strategist John Loos says that when affordability is measured in terms of average house price/average income, it appears to be improving, but “the catch is that the improvement in affordability refers to those who remain employed throughout the economic downturn”.

Loos went on to say that the economy “may already be at a stage of net job losses in the formal sector and this situation will partly offset any possible improvement in interest in the residential property asset class, as a result of improving affordability for regular income earners”.

“In short, given a slowing economic growth rate and slow real household disposable income growth for the household sector as a whole, we are not necessarily at the stage where an increasing number of people can afford the average priced house,” Loos said. The recent shocks in the stock market led the downturn, but areas in the lower price range may now be deteriorating faster.

Paul Beadle, managing director of Just Money, said that the current financial crisis playing out around the globe affects South African consumers in that the bottom line is there is less money to go around. “This affects businesses that are now struggling because their stock value has fallen or because the cannot find the additional investment they need to grow. It also means that many banks are unwilling to lend cash because of the greater risks now involved”.

Beadle also said that South African banks are “actually in good shape because they had limited exposure to the credit problems in the US that caused this crisis”. Nevertheless, investors on the global market are extremely wary of risk, so they are going to be cautious when it comes to investing in emerging markets like SA.

This lack of inward investment could have a profound impact on growth and profits of companies in South Africa, which is on top of the ongoing economic concerns and the high cost of living putting more pressure on consumers, said Beadle.

There are some estate agents who report a slight increase in show day visits and sales in recent months. According to Jeanne van Jarsveldt of the RE/MAX Group, “The past three months has seen a steady market recovery and has been the best we have seen on a national level during 2008”.

Loos warned that “early signs of improving household fundamentals are not believed to be sufficient to turn the market around” and that this is anticipated around April next year when the first interest rate cut is expected.

The information in this article is courtesy of Realestateweb (“Property prices: still looking ugly”, 1 October 2008).

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