FNB Warns Consumers

A press office feature released by FNB indicates that the risks to property have shifted from interest rates to economic growth and that consumers should heed this latest development. The FNB Property Barometer for the third quarter of 2008 was released on Monday and showed further weakening in levels of demand activity experienced by estate agents.

From a previous level of 4.4 on a scale of 1 to 10 in the second quarter, respondents to the survey indicated a further decline to an average level of activity recorded at 4.1, which is the lowest in the history of the barometer. The average length of time a property stays on the market has also increased from 14 weeks and 6 days to 20 weeks and 1 day in the most recent quarter.

Just 12% of the market comprised first time buyers, which is the lowest percentage on record, while sellers not obtaining their asking price increased from 85% in the previous quarter to 88%. The buy to let sector of the market is also relatively subdued, with a mere 13% of total buyers believed to be buy to let investors.

John Loos, FNB Home Loans Property Strategist, says that looking forward there have been some encouraging signs emerging, which reflect well on the future of the residential market. Most notably, the recent fall in oil prices, which has resulted in domestic fuel price cuts, as well as a softening in global food price inflation. FNB believes that the CPIX inflation rate may well be at its peak.

The onset of an expected decline in inflation would result in inflation having less of an impact on disposable income going forward, while interest rate cuts are anticipated from April 2009. The debt to disposable income ration in the household sector has also started to fall, which suggests that there is some improvement in the ability to service its debt burden.

However, in light of all the encouragement, Loos warns that consumers should not get too excited just yet. The current threat to global economic growth coming out of the US seems to be moving in to replace the previous risks. Loos says that it would be naïve to think that South Africa’s property market and financial sector are not exposed to the potential fallout from the US.

While the bailout plan is currently being implemented by the US government, it still remains to be seen as to how severely the recovery plan is regulated and how strict lending policies to households in the US become in a bid to restore responsible lending practices. The combination of tight lending criteria and falling house prices could have a profound impact on already-low consumer confidence in the US and subsequently on economic growth in the world’s biggest economy.

South Africa is by no means immune to the recessionary conditions and financial strain that may emanate as a result of the current crisis in the US. That being said, FNB’s most likely scenario appears to be one where domestic growth is slower, but remains positive. This would ultimately lead to a recovery in the demand for residential property from next year, as interest rates begin to decline.

South African consumers would do well not to ignore the current global growth risks when making investments going forward. If the crisis in the US gets significantly worse then the local property market will by no means escape unscathed. Loos suggests taking caution with regard to spending and borrowing practices until such time as we have more reliable indications of where the crisis stands. Despite some encouraging inflation and interest rates signs, South Africa is far from being out of the dark just yet.

This information is courtesy of John Loos (“Risks to property shift from interest rates to economic growth – ignore at your peril”, ITInews, 6 October 2008).

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Standard Bank Says House Prices Improving

A recent article published by Reuters discusses South African house prices, indicating an increase of 3.6 percent year-on-year in September. This is the first increase in 10 months, reflecting fresh activity in the ailing market after an extremely difficult year.

Standard Bank’s property gauge released on a monthly basis showed an increase in the median house price at R580 000. The five month moving average is still in negative terrain, but has improved year-on-year to –5.5 percent after several months of steadily falling prices.

After sharp declines in May and June, Standard Bank said that the rate of decline slowed in July and August, but indicated that the property sector would remain under pressure until consumer spending starts to recover from its cooling period.

The bank said in a statement that, “The unexpected 3.6 percent increase in September is not seen as a new trend, but rather the result of volatile monthly data. It is anticipated that the index will once again show low or negative growth in the months to come. Nonetheless, the latest data show that there is some life in the property market”.

Household budgets have taken a beating with the enforcement of stricter lending laws and a series of interest rate increases, which has in turn put the housing sector under strain. The central bank increased the repo lending rate by 5 percentage points to 12 percent between June 2006 and June 2008 in a bid to fight inflation.

This house price increase coincides with a slowing in the upward rates cycle in August and market experts predict that the next move in interest rates will be down sometime in 2009. Slowing household spending is evident in falling retail and new vehicle sales and the bank believes that the sector may not recover until this picks up again and interest rates start falling.

“Residential property will remain in the doldrums until such time that fundamental drivers of the market turn for the better and that may be some time off,” according to Standard Bank.

The information in this article is courtesy of Reuters Africa (“S.Africa house prices up, but problems remain”, 2 October 2008).

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