It is becoming increasingly difficult for homeowners to make money from their homes given the humdrum capital appreciation on residential properties that has signalled a slow recovery of SA’s housing market.
Globally house prices and demand fell at the height of the 2008 financial crisis but have started to recover since 2012, albeit at a glacial pace.
Yet SA’s housing market has been riding out the perennial slump as national house prices have barely kept up with inflation over the past five years. Measly and negative house price growth seems to be the new normal and the days of achieving double-digit growth are long gone.
Latest data from FNB reveals that since May this year, nominal house price growth (not inflation adjusted) has been declining from highs of 6.9% between January and April to a paltry 1.9% in November year-on-year – the slowest growth since July 2011.
The average price of a property (in nominal terms) in SA is currently 34 percentage points lower than in January 2005, a boom year for the residential market. In real terms (inflation adjusted) house prices are in the red, with property prices falling by 3.5% in November year-on-year.
And it gets worse. A number of property economists have downgraded their 2016 house price forecasts.
In January, Absa Home Loans property analyst Jacques du Toit and FNB property strategist John Loos expected the residential market as a whole to clock up nominal house price growth of 5% in 2016. However, estimates have since been downgraded to 3% to 4%. Negative growth of 1.5% to 2.5% is projected after inflation is factored in.
You don’t have to look far for reasons behind the renewed pressure the housing market is under: the slow pace of economic growth, rising interest rates (which have risen by 200 basis points since the hiking cycle began in January 2014), increased political uncertainty and waning consumer confidence.
Ronald Ennik of Gauteng-based Ennik Estates, who noted the decline of the residential property market in the beginning of 2015, says the market is mirroring the poor state of the economy. “If people are feeling buoyant about the economy and country, they tend to visit property show days. If they feel like the big picture is looking stormy then they batten down the hatches rather than come out and explore new properties and new locations,” Ennik tells Moneyweb.
Even property sales/transfer volumes across the country are following the downward house price trend. Deeds office records show the total value of residential sales have edged up slightly over the past five years, but the number of property transactions are starting to decline to between 65 000 to 80 000 per quarter (See graph below).
Source: Lightstone Property quoting deeds office records
Jawitz Properties’ CEO Herschel Jawitz says lower sales volumes may indicate that buyers are more cautious about the home buying decision and “are looking for value as the key decision-making criteria in choosing a home to buy”.
It may also infer that homeowners are opting to stay in their homes longer due to affordability issues instead of constantly upgrading to a bigger home. Before the financial crisis, homeowners would hold a mortgage for up to five years before selling a property, this is now more than ten years.
Seeff Properties chairman Samuel Seeff says homeowners are holding on to their properties longer especially in the middle to upper end of the market (properties typically valued above R2.5 million) that incur higher municipal rates and taxes, and whacking transfer duties tax. “Some are opting to stay in their properties longer and make changes such as renovations to their properties,” says Seeff.
It’s not all doom and gloom as there are a couple of silver linings. Firstly, finding value is increasingly becoming location specific, with some areas showing resilient growth, says Seeff.
Underscoring this is the Western Cape (specifically Cape Town), which has bucked the national trend, showing double-digit price growth of 10.5% for the third quarter of 2016 compared with Gauteng’s measly 2.1% according to FNB. Other regions have remained in the low single digits (See graph below).
The Western Cape’s performance has been fuelled by the steady movement of people to the region from other parts of SA, mainly Gauteng. Also, the perception that the Mother City is the best-run metro in terms of service delivery, the lifestyle offering and good government-run schools is a big drawing card.
The second silver lining is that the interest rate rising cycle might be over and coupled with house prices that are under pressure, homeownership may now be within reach from an affordability perspective. Seeff says first-time home buyers, who have been sitting on the sidelines this year, might enter the housing market from 2017.
For now, interest rates have dampened the first time home buying market, with FNB’s figures showing that the percentage of these buyers has fallen back from an early-2014 high of 28% of total home buying to 18% by the third quarter of 2016.
Expect more of the same in 2017, as house prices will remain in the low single digits. Jawitz expects house prices to accelerate by 5% to 6% in nominal terms in 2017. He adds that in real terms, house prices “will ‘break even’ or marginally decline depending where inflation ends up”.
- Part two looks at the reasons behind the Western Cape’s resilience.