Mortgage Market News: 27-07-2009
Home loans: Standard Bank
Standard Bank's property book for the first seven months of 2009 showed an average monthly decline of 3.8% in the median house price. The trend cycle of the July data confirmed that median house prices are still declining and that the weakness in the property market is set to continue. The July smoothed data yielded a rate of contraction of -4.9% compared to a year ago – the same as in June. In real terms, using our estimate of the CPI in July to deflate the nominal house price, the decline in real house prices comes to approximately 11.7%. The smoothed growth rate for July shows that the value of the median residential properties financed by Standard Bank was R540 000. The overall growth in the economy, the level of household income and debt, as well as the medium-term economic and financial outlook, are such that a clear and immediate improvement in the housing market is unlikely. The best that we can hope for is for price declines to stabilise towards the end of the year as the recent interest rate cuts work their way through the economy and overall sentiment improves.
We have highlighted in previous releases that the house price contraction has been aggravated by industry-wide loan-to-value restrictions. We have to highlight that any easing in credit granting criteria will be mild, as risks continue to lie on the upside in so far as job security and income growth is concerned
the year, when the debt service cost-to-income ratio is expected to fall to around 8% from its current level of 10.9%, while lower inflation will further free up some cash. Whereas consumer confidence edged up slightly to 4 index points in Q2 from 1 in Q1, the rating of the appropriate time to buy durable goods declined further to -21 in Q2 from -11 in Q1. Consumers are apparently becoming financially more conservative, which suggests that they are more inclined to reduce debt and build precautionary savings. Under these circumstances, the platform for establishing stability in house prices will continue to be weak.
Supply of residential housing lagging. On the supply side of the housing market the value of recorded residential building plans passed by large municipalities (at current prices) during January to May 2009 decreased by 44% compared to the same period in 2008. The value of residential buildings reported as completed during January to May 2009 increased by 8.2% compared to the same period last year. This will further weigh on house price growth as excess supply given weak economic demand will erode pricing power in the industry.
What are the risks to the property market? It cannot be expected that the housing market will flourish when the economy is under such strain as it is currently. As noted earlier, the outlook for the economy over the short term remains bleak. Statistics are still reflecting a rising number of insolvencies and liquidations and banks have reported significant increases in bad debt. Households currently owe banks an astounding R1.2 trillion, of which the greater part (70%) represents mortgage advances. Furthermore, about a third of South Africans with impaired credit records are more than three months in arrears. With house prices still declining, the wealth base of households is compromised, putting further strain on households. This will make for a mild recovery in the property market, which is unlikely to gather any traction this year.
On the monetary policy front it appears that downward phase of the interest rate cycle has come to an end. The cumulative 450 basis points cuts that commenced in December 2008, however, will still have to filter through the economy. The full impact of interest rate cuts on economic growth could take as long as 12 to 18 months. Further sharp increases of the order of 31% in electricity tariffs and possibly in the price of oil are in the pipeline over the next few years. This will put upward pressure on inflation and interest rates.
Outlook: Smoothed growth in the Standard Bank median house price index decreased by 4.9% y/y in July, averaging 3.8% y/y in the first seven months of the year. Over the short term, the economic outlook is expected not to improve much; however, relatively positive developments on the inflation front and the full impact of lower interest rates will in due course support the property market. It is anticipated that house price growth will be negative over the short- and medium term, but likely to bottom out towards the end of the year as the effect of interest rate cuts filter through the economy and the property market.
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