House prices a signal of gloom

Posted On Wednesday, 20 January 2016 21:52 Published by
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The trouble with house prices is because of a booming market that causes consequence of upbeat consumer confidence.


The trouble with house prices is that just as a booming market is both a cause and consequence of upbeat consumer confidence, the opposite is true when consumers are miserable.

The result is that SA faces a slide in house prices that could become something of a vicious cycle. The decline has been prompted by tougher times for households, whose budgets and borrowing ability are coming under pressure from higher prices, slower real wage growth, higher interest rates and more stringent credit criteria at the banks.

Crucially, too, it reflects the very weak state of consumer confidence. However, slowing house prices could themselves undermine confidence and consumer spending power, because of the effect lower property values will have on household balance sheets.

The news is bleak. Absa’s house price indices for December showed year-on-year growth of just 4.8% persisting since October, which means that in real terms, house prices were flat. The average increase for last year was just 5.8%, down from 8% in 2014. Barclays Africa economists predict house price growth will be even weaker this year against a backdrop of rising interest rates, low consumer confidence and tighter lending standards.

Fitch Ratings has a similarly bleak view, noting that the outlook for residential property and mortgage markets in SA has deteriorated and projecting that there will be no real house price growth this year and a decline of about 3% next year.

Fitch points to the effect on the housing market of higher mortgage costs, which will hamper the ability of borrowers, particularly lowincome earners, to pay, as well as job losses in key sectors.

Not that it is uniformly bad news. The nuances in the residential property market are striking, with First National Bank’s (FNB’s) Property Barometer arguing that “size counts”. But it is smaller that is proving to be better.

The average price of small homes increased by 10.5% year on year in the fourth quarter, up from 9% in the previous quarter, according to FNB. Many of these are in the “affordable housing” market, with an average price tag of just under R600,000.

That seems unlikely to be affordable for the working poor, but the trend is encouraging because it suggests at least that better-paid working-class households, and middle-income earners, are getting into the housing market and that the value of their homes is rising.

The trend since 2001 has been that the smaller, more affordable segment of the market has outperformed the rest, which signals expansion of SA’s middle class and of property ownership.

By contrast, more affluent households are seeing the boom times come to a rapid end as the value of their properties declines in real terms. FNB says price increases in the large-sized segment — with an average price tag of R1.9m — slowed to a mere 3.1% in the fourth quarter, well below house price inflation of 6.9%. Those affluent households are the big spenders in absolute terms, so if their wealth is dwindling, the effect on consumer spending could be significant.

Add to that the increasing number of farm sales, reflecting distress among commercial farmers, and it all makes for rather dim prospects for consumer confidence and household spending.

Reserve Bank figures show household consumption grew only 0.8% in real terms last year, and economists expect it to be weaker this year.

Since this accounts for almost two-thirds of total economic activity, that doesn’t bode well for growth.

Yesterday, the International Monetary Fund cut its forecast for SA’s growth rate this year to 0.7%, joining the growing ranks of economists with forecasts under 1%.

It has never been more urgent for SA to take action to unblock constraints to growth.

Lower prices undermine confidence and spending power because of their effect on household balance sheets.

source Business Day

Last modified on Wednesday, 20 January 2016 22:06

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