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Expect negative house price growth to 2020

Average house prices will grow at low single digits, meaning a decline in real terms …

FNB has become the first major player in the mortgage lending market to forecast negative house price growth, after inflation, over the next three years. In its second quarter Property Barometer, the bank says it forecasts “house price growth to average in a range between 3% and 4% for [the] period to 2020, which would imply a negative rate in real terms [i.e. after inflation] through the … period”.

Read: Property market reality-check in five charts
 
The bank’s property and household sector strategist John Loos says that should the expected weak growth and rising interest rate environment materialise this year, next and in 2020, “this would be insufficient to significantly alter the housing market’s performance from the current low positive single digit house price growth environment”. The bank points to parent FirstRand’s annual GDP growth forecasts fluctuating “not far from 1.5% for the period up to 2020”, with interest rates also expected to begin “rising mildly” from next year.

12-month averages

2017

2018

2019

2020

Average House Price

4.2%

3.5%

3.7%

3.4%

Real House Price

-1.1%

-1.1%

-1.7%

-1.8%

Housing Demand Strength Index (0-100)

55.5
(-0.4%)

55.9
(0.7%)

55.7
(-0.4%)

54.9
(-1.5%)

Housing Supply Strength Index (0-100)

54.2
(1.3%)

55.7
(2.7%)

57.5
(3.4%)

59.3
(3.1%)

Housing Market Strength Index (0-100)

50.7
(-0.9%)

50.1
(-1.1%)

49.1
(-2.1%)

47.8
(-2.6%)

Average time of homes on the market

15 weeks, 4 days

16 weeks

17 weeks, 3 days

17 weeks, 5 days

GDP growth

1.3%

1.3%

1.6%

1.4%

CPI inflation

5.3%

4.6%

5.4%

5.2%

Prime rate (period end)

10.25%

10.00%

10.25%

10.75%

Source: FNB Property Barometer

When looking at the overall economy – critical for the strength and health of the residential property market – FNB points to the economy being “firmly anchored in what it is calling the ‘super-cycle stagnation phase’”.

It argues that this stagnation is “largely the result of the ‘Three Great Stimulus Levers’ having been pulled, leaving little easy stimulus ammunition left”. These levers were:

  • The political settlement in the early 1990s meaning “the end of boycotts and sanctions, with normalisation of trade and business relations with the world boosting economic growth”;
  • “A huge ‘once-off downward structural adjustment’ in interest rates from late-1998, precipitating a credit-driven consumer and housing boom, taking economic growth still higher.”; and
  • A fiscal stimulus, via “wider fiscal deficit and rising government debt from 2008”.

FNB notes that “high household debt, and low interest rates, limit further scope for interest rate stimulus currently, while “growing investor concern around future ability to repay the debt, should it continue to rise, limits further scope” for stimulus.

Loos says that “with limited ‘easy’ stimulus ammunition available, South Africa’s myriad of economic structure constraints have become a drag on economic growth. These constraints are numerous, and include underperformance of key state-owned enterprises, notably the main electricity provider, a highly unequal skills distribution, and the well-documented labour market inflexibility, to name but a few”.

FNB says that “house prices, on average, have been in decline in real terms (adjusted for CPI) since early-2016”. For the housing market, the bank uses somewhat careful language, calling the current period the “second correction phase”. The first correction was a short and sharp one in 2008/2009, during and following the global financial crisis.

In this current “second correction phase”, FNB points to the fact that there has been “little in the way of interest rate stimulus (2 x 25 basis point cuts only)” with GDP growth not “exceeding 1.5% year-on-year at any stage (1.3% average for 2017)”.

With eight months of data available, FNB says it is “highly likely that 2018 as a whole will turn out to be a slower average house price growth year than 2017”. Separately, this will be the fourth successive year of a slowdown in house price growth. In real terms, the average house price decline is at -1% for the year-to-date.

FNB says that over the next two/three years, the “housing market would thus remain somewhat off its equilibrium (“equilibrium” referring to where housing demand and supply are in balance), which is seen in the projected average time of homes on the market prior to sale moving in a 16-18 week range, whereas we see around 12 weeks as being more-or-less where market equilibrium is”.

Loos says he believes that to “achieve positive house price growth in ‘real’ terms”, economic growth needs “to be nearer to 3%”. He cautions that “a full blown recession (GDP decline) would cause not only ‘real’ house price decline but nominal (actual) house price decline too”.

* Hilton Tarrant works at YFM. He can still be contacted at hilton@moneyweb.co.za.

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…and one does not want to think about the effect a fiscal cliff scenario will have on SA’s house & other asset prices. It will end up where Govt tries to print more money…inflation runs rampant…and so does interest rates.

Ever re-calculated what your current homeloan installment would be say in a 20% or 50% scenario? Rather exciting… 🙁

The banks play a game where they never loose.

You say it’s your money in the bank they say it’s their asset base.

The biggest threat to banks are the low fee crypto coins and the fact that your money belongs to you.

Sorry but that is absolute rubbish. Banks disclose your money as customer deposits as a liability on their balance sheets. They disclose loans as assets.

Dont you think it is a bit of the topic to bring in crypto on an article around houseprices?

and more rubbish…you think you are the owner of cryptos…think again

@notwarren and my critics stand in line ladies and gents hahaha.

Crypto Currency and Block chain technology have everything to do with price of houses.

101:
The term ‘Cryptography’ is a derivative of two Greek words ‘Kryptos’ and ‘Graphein’, which literally translates into ‘Secret’ and ‘Writings’

102:
Banks and banker have had a good run like all good things they must come to an end and accept that they are no long efficient as the new world order transitions. They are being replaced by Crypto Currency And Blockchain technology.

103:
As a global trotter I’ve seen first hand how the standard pricing of goods and services are becoming, everything from minimum wages to house prices. As market forces dictate we are truly becoming part of One World without borders.

104:
South Africa as one of the world’s most unequal societies is the perfect landscape to benefit from this adoption. By having all the information of a property and ownership captured by this technology we will see the real world pricing and value in realtime.
This will also solve ownership of land and other assets whilst maintain a live database that gives instant Statistical information.

105:
There are a ton of middlemen involved with the real estate agents, lawyers, banks, and more people with their own fees. All of these costs can be bypassed if you were to buy or sell a property over a blockchain using cryptocurrency. This means you pay less and the transaction occurs faster—a win–win for both the buyer and the seller.

Is this a sign that property prices will go up soon?

They are looking dirt cheap and I am always wary when hearing very negative or very positive news.

I sometimes see asset managers down talk or pep talk shares and sometimes the share prices go in the opposite direction.

A short while after we bought our house, interest rates climbed from 14 to 25%. It nearly sunk us and set us back at least a decade. Had to jettison other properties and assets at low prices just to stay afloat. I fear that if we even had a 3-5% increase in rates now, there would be many people underwater. Time to batten down the hatches !

We tend to welcome higher rates of inflation because it destroys the value of our debt. Inflation is supposed to make it easier to pay down debt. This only works if one can afford to pay the higher interest rates though. Many businesses went bankrupt in the 80’s when interest rates went to 28%.

The world is at the end of a bull market in bond prices that lasted for 4 decades. The bull market in bonds (lower interests rates) drove the bull market in property. The rules of the property game are changing. Capital growth will stagnate, but rent income will increase along with the rising interest rates.

I agree,but by that logic, would it then not make sense to make considerable ZAR based debt to buy property with the exception that you only make so much debt that even at say 30%-50% interest rates you would be able to hold you head above water?

The ZAR would lose value like a rock, but your property can rely on the age old intrinsic value mechanism kicking in and saving the day?

Insightful comment. Performance of my property unit trust investments in line with your views.

I have to disagree Loos. As it stands at this moment S.A. is heading towards an economic crisis, without taking into account the election of 2019. Over-taxed consumers, the actual inflation being experienced by every consumer, weak rand, economic uncertainty due to land expropriation, high unemployment, etc., etc., and the forecast for the property market looks very, very bleak indeed. The corrupt ANC Government had created the “perfect storm” – the question is what’ll be the fall-out?? Only the extremely privileged can afford to purchase property, irrespective of race or creed.

The word privilege means: “having special rights, advantages, or immunities”. I certainly do not have any special rights or advantages, I simply worked hard, saved money and then bought a house. There was no “privilege” involved.

I hear you and I also hate it when my privilige gets thrown back at me. But I know in my case my relative success was heavily influenced by being born into a middle class family, having parents who heaped love and attention on me, receiving an excellent education etc etc. Yes I worked hard also but so does the guy mowing my lawn that gets up at 5 every morning to get here…

Loos is beholden to FNB his employer and always talks institutionalized meaningless gibberish.He always talks the house market up. Read Magnus instead or talk to a conveyancer.

To be fair he is predicting a decline in real terms with the qualification that if we go into a full blown recession prices will decline in nominal terms as well

So frustrating that the national debate is about expropriation without compensation and outside of the financial media little attention is paid to the slew of worrying datapoints and anecdotes that points to a serious long term secular decline in the SA economy. I would go as far as to say a sharp decline is preferable as one could then argue that it is merely cyclical. This is however an erosion of demand

I confess I didn’t read the article but I’ve seen too many like it – only skimmed it to see if there was any mention of where house price growth will be negative and didn’t see any mention.
House prices are primarily linked location and to make a blanket statement related to some simplistic economic projection without referring to location is just absurd and stupid…

Does this mean that our municipal valuations decrease, our rates decrease and that our house insurance premiums decrease?

Loos rhymes with D…

I think you might be on the wrong website

Oh don’t we do rhymes here?

Is South Africa the only country that uses the term “Negative Growth”? It sounds like the least worst thing a blind man can say to his deaf daughter over a broken telephone while sitting on a corner of a round table.

“Declining prices” sounds more like proper language

Attended a very sobering execution of sale in fisherman’s drive llandudno this Saturday…. A very nice Italian looking villa that was on the market for around 35- 40mill a year ago… Well any guess what price the hammer dropped on it..?
13.25mill….
U could just feel the utter chill that moved thru the crowd as the llandudno neighbour’s started to realise that their castles are now more liabilities than assets.
Was a very sobering experience. I think it is safe to say… The current market outthere is alot worse the is being reported on… And is changing at a way more rapid pace than the average investor is aware.

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