Houses in Cape Town

The house price growth in South Africa slowed in November and is expected to remain that way in 2012 due to slow economic growth predicted for 2012.

According to the FNB House Price Index, the November average house price was still 3.2 percent higher than November 2010 year-on-year (y/y).

John Loos, FNB Home Loans property strategist says this represents a slower growth rate than the October revised y/y growth of 4 percent and represents the third consecutive month of slowing y/y house price growth.

The average price of homes traded as recorded in the FNB House Price Index, was R804 242.

In real terms, the October FNB House Price Index declined by -1.9 percent y/y, with consumer price inflation of 6 percent in that month significantly higher than the 4 percent nominal y/y growth in house prices.

Loos explains that in nominal terms, the average house price in real terms is -16.6 percent lower than its long term peak reached in February 2008.

In nominal terms, the index is a marginal +5 percent higher than it was in February 2008.

Compared to July 2000 when the index started, the average price at November 2011 was 209.5 percent higher in nominal terms, and 63.8 percent higher in real terms, he says.

On a month-on-month basis, the seasonally-adjusted FNB House Price Index shows the residential market to already have been in a state of nominal price decline (negative growth) for the past four months.

In November, the extent of this price decline in October was -0.74 percent, which is slightly less decline than the revised -0.89 percent measured in October.

Since the seasonally-adjusted price decline started four months ago, the total decline has been -2.3 percent, he says.

In 2012, a real possibility exists for further interest rate reduction but the bank cautions against expecting major interest rate reduction.

FNB says the market remains very flat and looks likely to remain so for the foreseeable future.

The bank says there is no obvious indication to suggest any marked improvement in house price performance next year.

Given the expectation of a slower economic growth year in 2012 and slight interest rate reduction at best, the average house price growth for 2012 is expected to be still slower than in 2011.

After the 2010 mini-recovery that produced an average house price rise of 6.1 percent for 2010 as a whole, 2011 looks set to end at an average rise of 3 percent.

In 2012, we expect still slower nominal growth at between 1-2 percent.

This would translate into further house price decline in real terms, with consumer price inflation expected to move in the 4 to 6 percent range during next year, says FNB.

Loos says while he believes there is a possibility that interest rates may go down slightly further, he is of the view that for the property sector to place all its hopes on interest rate cuts is as questionable as the mining and manufacturing sectors hoping for a weaker rand to cure all of their ills.

The reality is that bringing the property market back to health is far more complex than merely cutting interest rates.

At 9 percent prime rate, the interest rates are at multi-decade lows already.

For the housing market’s longer term health, it is important that the household debt-to-disposable income ratio be brought down to lower levels.

From this point of view, the current level of interest rates appears to strike a good balance, providing relief for highly-indebted households, assisting in a decline in our home loan arrears and non-performing loans in recent years, but on the other hand not yet having encouraged household borrowing growth to accelerate.

Instead of interest rate cuts, we should rather be hoping for a more significant improvement in the residential rental market in 2012.

In 2012, smaller homes are expected to be more popular as they contribute to reduced running costs.

He says what appears necessary to improve residential property’s attractiveness as an asset class is a strong rental market coupled with slow capital growth in order to significantly increase net yields on property.

A better-performing rental market is more a function of the economy than of interest rates alone and this depends greatly on the global economy’s performance which is currently fragile.

In 2012, Loos has the following expectations:

- the more affordable segments of the housing market will outperform the higher priced segments

- high transport costs due to high fuel prices can support demand in close proximity to business nodes

- smaller homes are expected to be more popular as they contribute to reduced running costs.

Downscaling and downsizing is the latest trend when investing in real estate in 2011. The glamour and glitz is now gone, with South Africans becoming a little more realistic when it comes to maintaining large properties, massive swimming pools, rolling lawns and a bevy of servants. The cost of maintaining properties on this massive scale has lost its appeal.

It costs an arm and a leg to keep a team of staff well taken care of, and swimming pools are not only expensive, but difficult to keep in pristine condition.

So what is the answer to the big South African dream? Do not despair…downscaling need not be a step down, but a little step to the side.

With the advent of magnificent golf estates springing up all over South Africa, wonderfully built state-of-the art townhouses being designed, and architects winning international awards, you can realize every part of your dream, only without the added expense and inconvenience of an outlandishly enormous property. Gated communities and estates are particularly attractive options for those looking to downsize, as they often offer the benefits of shared resources and management costs.

This is a new decade; the dawning of a fresh start with an upswing in property in South Africa, starting new trends and breathing a positive air into the property world and also the economy in general. This is good for everyone’s psyche, leaving all the doom and gloom of the past behind in 2010.

Real estate sales in 2011 will most certainly lean towards smaller properties that are less expensive to operate and maintain, whilst putting more cash in your pocket. For example you can literally save thousands on municipal costs when running a smaller property. Most noticeable will be the demand for properties in the bread and butter range of under a million. Unlike in the past, this will not only apply to first time investors, but to second and even third time buyers.

Real estate for sale in South Africa has taken a 360 degree turn-around, and the demand for smaller properties, even in the higher echelons of the market, is reflected in the records of some of the top real estate agencies.

There has never been a better time to invest in property. Since interest rates are sitting at a 30-year low, coupled with the fact that the South African property market is currently favoring buyers, opportunity for solid property investments abound.

Surprisingly, despite the favorable conditions, many buyers are still not beating down the investment door in an effort to take advantage of the good deals on offer.

Unfortunately, it appears as though the recession has, to some extent at least, made buyers wary of big purchasing decisions. This is understandable as before the crisis, credit was far easier to come by and a number of South African consumers got severely burnt by over-extending themselves. The number of distressed properties that came on to the market as a result bears testimony to this.

However, the fact that there are so many properties on the market makes it the ideal time to invest. Timing in the property world is everything. Buy too late when stock is short and property prices are unrealistically high, and you could struggle to sell, at least in the short term. Buying at the right time, when there is ample stock and prices are low, can and often does, reap solid rewards for those willing to invest.

One of the biggest problems South African consumers have been facing is access to finance. The National Credit Act as well as the recession forced the banks to re-evaluate the way they conducted business. Raising finance for property became far more difficult than before and banks also demanded larger deposits.

This, however, is slowly beginning to change and while it seems that South Africans are going to have to get used to the idea of putting down a deposit, the deposit amounts the banks require are gradually declining. Financial institutions are also now granting more bonds than in the last two years.

First-time buyers, in particular, are finding it easier to raise finance providing that they have a clean credit record and are not over burdened by debt. Anyone considering investing in the property market should approach a bank or a mortgage originator to ascertain exactly how much they can spend. Forewarned is forearmed and approaching an estate agent with a clear view of what you can afford often gives the buyer the upper hand.

But the present favorable conditions for buyers will not last forever; interest rates will rise and the demand for property will grow. Demand drives property prices and those who are considering investing, but are waiting for better days, should seriously consider buying now. We have already seen a rise in sales and although this is not expected to reach the heydays of the property boom just yet, things are certainly looking up for sellers.