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Slow recovery for property expected

Posted On Wednesday, 02 June 2010 02:00 Published by Eprop Cormmecial Property News
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The latest gauges indicate that the property market is on a slow recovery path.


The median property price financed for the month of May rose to R579 000 from R571 000 in April, representing an increase of 2.3% relative to last year, from 2% y/y in April, the latest Standard Bank Residential Property Gauge shows.

The bank said that while this growth remains mediocre, the average home loan financed rose by a proportionately larger amount, providing confirmation that the sample of homes financed were more widely dispersed in May.

"The outlook for the sector remains constructive; however, a confluence of factors will limit the market from showing a significantly higher recovery this year," Standard Bank said.

Despite improved affordability, it said, the housing market remains constrained by (1) high household indebtedness, (2) high unemployment, (3) risks to the economic growth outlook, and by extension income growth.

"All these factors jointly limit the scope for the granting of profitable finance, which is required given the vulnerability of the economy to global dynamics.

"Moreover, the transmission channel of weakness in Europe into the economy, and, more particularly, the housing market is as follows: (1) weaker exports, hurting employment and income prospects, (2) a volatile exchange rate in the face of risk aversion and weaker commodity prices, which could weaken financial asset growth, (3) discontent with the housing
market as an investment class given the high levels of unemployment.

"These factors could combine to weaken the economic growth momentum between the end of this year and 2011, and limit significant advances in the property market," Standard Bank said.

"Should inflation surprise on the downside and growth continues its upward trajectory this year, the housing market could register growth between 6% and 8% in the second half of the year.

"At this juncture, growth between 3% and 5% seems more likely," it added.

The FNB National House Price Index - also released on Tuesday - showed a further acceleration in year-on-year growth to 11.9%, from a previous month's growth rate of 10.1%.

FNB said this remains largely the result of the 5.5 percentage points' worth of interest rate cuts to date, but one must start to mention the contribution of an economy that is once again growing positively, and which in turn translates into somewhat stronger wage bill growth.

In real terms, adjusted for consumer price inflation, house price inflation for April measured
5.1% year-on-year, compared to 2.8% in March.

The acceleration in house price inflation in real terms, it said, is the combined result of accelerating house price inflation as well as ongoing decline in consumer price inflation.

The "comeback" of house prices in 2010 to date has meant that the cumulative house price inflation since July 2000, almost 10 years ago when the FNB data series started, has hit the 200% mark in May, measuring 200.4% to be exact.

In real terms (adjusted for consumer price inflation over the 10 years), the cumulative house price inflation rate from July 2000 to April 2010 was 69.3%.

FNB pointed out that the economic data released in March was, on balance, positive for residential property, with an improved economic growth situation and little in the way of inflation and interest rate hiking concerns.

"However, the housing CPI reminds us of various constraining factors on the housing market, including high utilities cost increases related to housing, and weak rental inflation supporting our view that the residential market should not expect too much support from the buy-to-let component," the bank added.

May also brought an unchanged interest rate decision from the SARB, leaving prime rate at 10% since the last rate cut in March.

The March reduction was the sole cut since the end of the 2008/09 series, which started in December 2008 and continued uninterrupted to August 2009, totaling 5 percentage points all in all (with the March cut bringing the total in the cycle to 5.5 percentage points).

"It is now over 17 months since the first in the series of rate cuts. One view held is that it takes approximately 18 months to 2 years for the full effect of interest rate cuts to filter into the economy.

"With residential property demand being a leading part of the economy, one would expect much of the positive impact of the interest rate stimulus to have possibly been completed in a shorter time than this 'rule of thumb'.

"We believe, therefore, that at around mid-year we should start to see the first signs of declining growth, first in residential demand for existing homes, and then shortly afterward in house price inflation (this does not apply to the new development sector which lags considerably)," FNB concluded.

Last modified on Monday, 10 March 2014 13:30

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