State of the property

State of the property

Posted on July 10th, 2008 Huis-Huis No comments

Anyone who has been keeping an eye on residential areas in South Africa can tell you that the South African real estate market is a whole lot slower nowadays than a year or two ago. For Sale signs stand on sidewalks for months – some seemingly sprouting seedlings in the meantime – without success.

Some real estate agents are getting that gaunt, gray look of hunger and desperation, and some are even leaving the profession, because property sales are few and far between. And those agents that are still surviving must be seriously contemplating finding supplemental (if not alternative) income streams.

Even the estate agency affairs board made some nervous noises earlier this year, because the funds they have become used to from estate agents’ fidelity fund contributions have declined dramatically. It seems as if this governing body will have some difficulty with budget constraints for a while…

Mortgage intermediaries such as bond originators are also taking strain, of course. When properties don’t sell, commissions for home loan originations are much harder to come by too.

This month, statistics released by the bond originating firm ooba (previously Mortgage SA) show that more than 50% of all home loan applications were rejected by banks last month, up from just over 40% of applications in June last year. And then ABSA added to the gloom by releasing some sad residential house price figures.

In the meantime, bank shares have taken a hammering and a number of banks have announced that they will be cutting back staff in home loans-related departments. So, we can reasonably deduct that the general outlook banks have for the property market is less than rosy, even if they don’t say so outright.

The latest house price figures show that house prices in the middle income range have remained static for the past six months. Standard Bank’s median house price (half of all houses sold are cheaper; half more expensive) is more than 11% lower than June last year. Absa’s House Price Index for June shows that property prices in middle income suburbs rose at a very modest 3,8% (significantly below the inflation rate of 10,9%.). But when taking into account the effect of inflation on the real value of the money we earn, it is quite clear that residential real estate is losing money.

The decline in enthusiasm for South African real estate can be attributed to a whole bunch of factors: High interest rates, stringent new consumer credit legislation, soaring fuel prices, soaring food prices, soaring electricity prices, negative sentiments about Eskom’s lack of electricity supply capacity, negative sentiments about xenophobic attacks, negative sentiments about pending expropriation legislation, negative sentiments about the South African government’s lack of condemnation of the Zimbabwe crisis and negative sentiments about the country’s general political landscape are to blame.

Real estate affordability is a major issue for owners and prospective buyers. Bond repayments rose nearly 40% in the past two years because of the prime interest rate moving up from 10,5% in June 2006 to 15,5% today. And to make things worse, average interest rate concessions to prime also fell from 1,31% to 1,25% in the past year. This makes it much harder for buyers (that need home loans) to buy and homeowners (with mortgages) to keep properties. Whatever the reasons, the factors that reduced the affordability of residential property has led to a noticeable decline demand.

Unfortunately for property owners, sellers and property professionals, the tough times of the property industry are not set to end soon. Both ABSA and Standard Bank are expecting another interest rate hike in August. And several experts predict that house price growth will fall even more toward the end of 2008 and into 2009.

The last time South Africans experienced real financial pain because of their properties, was in the late 1990s, when interest rates soared to over 20%. But what is extremely worrying, though, according to Standard Bank’s economic research division’s Sizwe Nxedlana, is the fact that inflation is now higher than it was in the late 1990s and that house price growths were not falling drastically between 1997 and 1999, as it has been doing in recent history.

So, yeah. What I’m trying to say is that, For the moment, the outlook for residential property is not good.