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| Lola Kramer 083 252 1023 Principal Agent & Property Expert |
South Africa is experiencing a property market correction. The question is whether it is or has been on the same scale as has been experienced in the USA during the last 3 years. The American dream has in some states unfortunately changed into an American nightmare. Only a certain sector of the South African property market is experiencing a correction akin to the “American nightmare” of a devaluation of property value up to 50% and has predominatly been visible on two fronts.
The first area is in the buy-to-let market section and more specifically in areas with an average to low rental demand. This generalized statement needs however to be qualified even further to pinpoint complexes with a below-par managing agent and/or a Body Corporate who has allowed a bad rental mix to develop over the last 4 years. Compelxes where the house rules do not “control” the quality and the average rental income for the units, have been experiencing sheriff auctions which culminated in a drop of value between 45% to 60% below present CMA (comparative market analysis) values.
The second area has developed around the affordability of credit/cost of servicing bonds, resulting in a high level of household debt to disposable income (due to high unemployment levels etc).
This buyers market environment in the above-mentioned first “front” came about due to the new property investors who did not do their homework properly during the “2004/2006 boom”. Creating a distressed sales market scenario with an oversupply of stock which will take some time to clear out. With e.g. South Africa’s biggest bank and bond provider, ABSA, indicating that their bad debt book is at present about 18%, a change in stock levels (due to an oversupply of certain property types) before 2014/15 is highly unlikely – despite a growing black middle class and savvy property investors buying up rental stock which is delivering the sought-after 1% per month returns. A nominal house price growth closer to the historical 10% per annum average could therefore only become visible again when the oversupply has been dealt with, potentially initiating another so-called 23-year property cycle with a positive capital growth cycle in nominal as well as real terms.
In total, approximately 11% of all homes in the United States are currently standing empty. No comparative residential market figures are available for South Africa – but given the huge demand experienced for rental homes, it is highly improbable that there is such a problem at all in the suburbs of the metropolitan areas. According to property economist Rode & Associates, apartment vacancy rate across South Africa has dropped from a peak of around 6% in the fourth quarter 2009 to the current 4%.
The following correction symptoms are present:
1. High percentage of distress sales
The large percentage of distress sales in the property market has increased in the first quarter of 2011 to 22% of total sales – up from 17% in the last quarter of 2010. A high percentage of sellers are therefore forced to downscale due to financial stress, often below market values.
The large percentage of distress sales in the property market has increased in the first quarter of 2011 to 22% of total sales – up from 17% in the last quarter of 2010. A high percentage of sellers are therefore forced to downscale due to financial stress, often below market values.
2. Availability of credit (bonds or mortgages) limited
Housing price deflation is being fuelled by banks that are constantly reassessing their exposure to the home loans market and being cautious in granting new bonds. According to OOB, their March 2011 levels of bond approvals only equate to 36% of the levels achieved during the top end of the property boom in April/May 2007. It is however their highest levels since October 2008, showing that there is a gradual but positive movement in the SA Property Market. Only 44,7% of Ooba’s bond applications are at present initially declined by the banks – which is an -8.1% improvement in the decline ratio. The effective approval rate has improved from 58,9% in March 2010 to 64,5% in March 2011.
Housing price deflation is being fuelled by banks that are constantly reassessing their exposure to the home loans market and being cautious in granting new bonds. According to OOB, their March 2011 levels of bond approvals only equate to 36% of the levels achieved during the top end of the property boom in April/May 2007. It is however their highest levels since October 2008, showing that there is a gradual but positive movement in the SA Property Market. Only 44,7% of Ooba’s bond applications are at present initially declined by the banks – which is an -8.1% improvement in the decline ratio. The effective approval rate has improved from 58,9% in March 2010 to 64,5% in March 2011.
The implementation of the NCA (National Credit Act) has redefined a borrower in South Africa. A large percentage of borrowers have been classified as a credit risk based on e.g. a few missed credit payments. Until the banks will operate on a more discerning basis, evaluating the long-term reliability of the applicant as evidenced by his job record and possibly testimonials from his work superiors and bank manager, home ownership in the entry level property market will remain a problem . . Deposit requirements remain a stumbling block for e specially buyers who want to buy into the affordable housing markets in townships. According to Ooba the average deposit as a percentage of purchaswe price fell 23,9% year-on-year to R134 519, equivalent to an average deposit of 15,6% of the purchase price of the average home in SA of R860 492.
3. High bond or mortgage stress levels
According to Rael Levitt (CEO of Auction Alliance), South African house price deflation is reflected in negative housing equity to most probably 1 in 15 (about 6,66%) of all South African homes. This is however in comparison to the USA still at a fairly low level, as at the end of 2010, 23% of all US homeowners with a mortgage owed more on their homes than their homes were worth.
According to Rael Levitt (CEO of Auction Alliance), South African house price deflation is reflected in negative housing equity to most probably 1 in 15 (about 6,66%) of all South African homes. This is however in comparison to the USA still at a fairly low level, as at the end of 2010, 23% of all US homeowners with a mortgage owed more on their homes than their homes were worth.
4. Low sales volumes
Mike Schussler (Economist.co.za) indicated that although 16.8% more transactions (9506) registered in South Africa in the Deeds Office during January 2011 than in January 2010, it is still 40% below the average transaction volumes of the S property market during the last decade – i.e. about 16 000 transactions per month for 192 000 p.a.)
Mike Schussler (Economist.co.za) indicated that although 16.8% more transactions (9506) registered in South Africa in the Deeds Office during January 2011 than in January 2010, it is still 40% below the average transaction volumes of the S property market during the last decade – i.e. about 16 000 transactions per month for 192 000 p.a.)
5. In January 2009, 9190 transactions had been registered in the Deeds Office – showing an increase of 3.5% in registered transactions between January 2009i and January 20-11. If the above 22% of distressed sales can be applied to the monthly registrations during the first quarter of 2011, it means that about 2100 property transactions per month are at present transacted nationally under distressed conditions. This is up from 1200 per month as had been estimated by Auction Alliance during the beginning of 2009.
Another dampening influence on sale volumes in South Africa has been the relative low levels of buy-t-rent investors – who at the moment comprise only some 7% of the total property buying market, down from about 22% during the property boom period.
6. Besides “debt”, the rest of the property market stimuli have been strong enough to keep the price grown in South Africa relatively intact – varying between -10% to just over 0% during the last 3 years.
Nominal price growth of between 1% and 1,5% is currently forecast by ABS for the South African property market in 2011. Based on this forecast and a projected average consumer price inflation rate of 5% this year, house prices are set to decline by more than 3% in real terms this year in South Africa.
7. Uncertainty about market values of SA property
Despite a 421% increase in price between 1997 and 2011, even the Economist (of 3 March 2011) did not or could not determine in their global house price index whether South African properties are in fact overvalued – relative to 20 other countries. In theory, the price of a home should reflect the value of the services it provides. People who choose to rent their homes, buy those services on a monthly basis. Home prices should therefore reflect the rents that tenants pay.
Despite a 421% increase in price between 1997 and 2011, even the Economist (of 3 March 2011) did not or could not determine in their global house price index whether South African properties are in fact overvalued – relative to 20 other countries. In theory, the price of a home should reflect the value of the services it provides. People who choose to rent their homes, buy those services on a monthly basis. Home prices should therefore reflect the rents that tenants pay.
An open question since the 2007 turning point – i.e. the top-end of the price growth cycle, is whether the capital growth gains in house market values created a property market bubble and stands to be corrected bya dramatic price decrease. This question has also played a role in undermining buyer confidence. As some buyers view the extraordinary growth of 421% achieved in the SA Property Market in the last 14 years at an average of 30% per year, as a market which stands to be corrected, not only in nominal price terms but also by about 50% in real price terms.
In the 1980’s however high levels of inflation created a scenario where nominal prices of houses kept growing due to the devaluation of the Rand – preventing a bust scenario as the price growth pattern remained on a plateau for about 6 years to 1997, before nominal prices of the average house began another rapid grown phase – between R194 435 (1997) to R930 332 (2007) – that is a growth of 378% in 10 years or about 37.8% per annum.
The South African property market has during the last 50 years reacted differently from the boom-bust scenarios experienced elsewhere in the world. The 2010 proeprty plateau will most probably be longer than the 6-year span experienced during eh 90’s and its run will be determined by the inflation rage and locally its effect on our currency. The biggest difference however between the plateaus of the 90’s and 2010 is the remedial effect that the growing black middle class will have on the property market.
To expect a 50% doom and gloom “correction” in the SA property market simply because the forces of the property market in the USA necessitate it there locally, is to ignore the huge historical difference beween the countries. The South African market has potentially amongst the highest percentage of first time buyers (or upgrading buyers) in the world amongst the emerging black middle class – most of them eager to commit the moment credit will become more readily available.
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