JOHANNESBURG – Is the residential property market in fairly good shape while the automotive market is struggling?
At first glance, the most widely cited data tracking the performance of the property market and new vehicle sales seem to suggest that.
According to the FNB House Price Index released earlier this week the average house price for August rose 5.4% year-on-year. This represents the 7th consecutive month of gradual slowing, but the bank points out that while the pace of improvement has reduced, “it should not be confused with a deteriorating market”.
Data from Absa Home Loans note that growth in the average nominal value of houses in middle-segment categories of the residential market varied between 6.5% and 8.5% year-on-year in the first seven months of the year.
At the same time figures released by the Department of Trade and Industry indicate that new vehicle sales declined 1.4% year-on-year to 55 722 vehicles in August. This brings the decline in new vehicle sales in the year to date to 4.3% year-on-year.
A direct comparison of the performance of these two markets is difficult. The data measure different aspects of performance and it is somewhat problematic to try and compile a tool that would allow for an “apples with apples” comparison. Merely focusing on growth numbers could be misleading.
John Loos, household and property strategist at FNB, says new vehicle sales growth materialised earlier after the economic downturn as vehicle affordability did not deteriorate nearly as much as home affordability during the boom years because of the “unlimited” supply. It was easier to import more cars or increase production.
The housing market on the other hand couldn’t keep up with the pace of demand during the good times, house price inflation surged significantly and it hasn’t really corrected downwards in a meaningful way, he notes.
As a result the housing market was worse off in terms of affordability (compared to the vehicle market) which led to a much slower pace of volume recovery in the housing market.
Moreover, for a lot of South Africans a car is a bigger priority than a house, he says.
Public transport is insufficient and where aspirant first time home buyers can’t yet afford a house, they can stay home with their parents or rent for longer, but they will likely need a car, Loos notes.
Therefore the recovery in the housing market has been slower – the first priority was to replace aging vehicles and for newcomers to enter the car market as soon as interest rates came down.
However, the replacement cycle has now largely been complete.
Christie Viljoen, senior economist at NKC Independent Economists, adds that recent strike action has been to the detriment of new vehicle market. In the last year the depreciation of the rand also led to new vehicle price inflation outpacing official inflation numbers. This has negatively affected sales volumes.
The current situation
Loos says in a way the housing market still reflects a weak consumer situation. Volumes and new residential building completions are still relatively low compared to the boom years.
He says the fact that house price growth has remained in single digits over the last couple of years despite extremely low interest rates highlights the financial constraint faced by the household sector.
While some estate agents maintain that the property market is performing well, one should also keep in mind that there are considerably less estate agents operating in the market than during the boom period, he says.
The residential property market is still propped up by very low interest rates.
“Will it maintain its strength if interest rates were to rise by two, three, four percentage points? I doubt it. It will weaken quite substantially,” Loos says.
He says the significant stimulus injected into the world economy and the local economy has supported both markets.
But with the stimulus for the world economy about to be witdrawn, and the stimulus for the local economy gradually being withdrawn one should expect some weakening, Loos says.
Viljoen expects new vehicle sales to continue on its negative growth trajectory for the remainder of the year while rising interest rates will likely also result in a muted situation next year. He also expects average house price growth to remain on current levels for the next few months.