Property values to stay flat this year

2011-01-15 11:24

Homeowners are faced with near zero or at best modest growth in the value of their properties this year as the recession-battered housing market is expected to be deprived of interest-rate cuts, the element vital to boosting property prices.

House prices tend to go up when interest rates are low because more people are more able to afford houses. But many households in the country have high levels of debt, making it difficult for them to afford more or bigger homes.

Only buyers who have cash or those who can raise funding will be smiling.

They may be able to score ­themselves some bargains ­because fewer people will be able to afford houses.

Property strategist at First ­National Bank, John Loos, said that ­sluggish property prices in ­recent years have almost killed the ­market of investors who bought houses to rent them out.

He said the buy-to-let market ­accounted for only 7% of all ­residential property sales last year, less than a third of the 25% it ­represented in 2004.

This means that in 2006, one in four ­residential properties sold were to buy-to-let investors. Now that ­figure stands at one in 14.

The sharp spike in interest rates ­between 2006 and 2008 has been blamed for choking off this market as expensive credit puts properties out of reach for many ­second-home buyers.

Jacques du Toit, property ­analyst at Absa Bank’s homeloans unit, said this poor demand for property had negatively affected property-related professions such as property developers, ­estate agents, architects and ­conveyancers.

“The property market has ­become an important sector of the economy. All these professions suffer when the property market is not doing well.
“For instance, architects rely on business coming from property developers and at the ­moment the building sector is down,” said Du Toit.
According to Statistics SA, the value of new residential buildings constructed was 20.5% lower year-on-year at R8.4?billion in the first seven months of last year, compared to R10.6?billion in the corresponding period in 2009.

Bearish property analysts ­anticipate house prices will climb by between 1% and 4% this year, while bullish forecasters see a price growth of 5% to 8%.

Loos has projected a price growth of 1% to 2% this year, ­citing high levels of consumer debt, a weak economy and zero prospects of interest-rate ­reductions as factors that will put a lid on house-price increases.

“We are going to have a tough year because I don’t see any ­interest-rate cuts or any further stimulus this year,” said Loos.

The latest edition of property publication Rode’s Report ­predicts that the reduction in the new supply of housing stock should, in the long term, ­support property prices and house rentals.

But the publication is bearish about this year’s prospects, ­forecasting an 8% slump in ­property prices. Rode’s Report noted that in November last year, the growth in house prices continued to lose momentum, with prices falling by 1% compared to ­October.

“However, more interesting is the fact that house prices have been contracting on a ­month-on-month basis since May last year.

“In November, house ­prices were roughly 0.7% lower than they were the month before.

“Thus, assuming prices ­continue to contract at this rate, houses could be as much as 8% lower in 12 months’ time,” the ­publication predicts.

This sluggish increase, or ­contraction, in house prices mean the market is set to experience a negative turnaround after growing by between 6% and 7% last year.

In the first half of last year, house prices grew by 10% in response to massive interest-rate cuts in 2008/09.

But Lew Geffen, the chairperson of Lew Geffen Sotheby’s ­International Realty, has a rosier outlook on the South African ­property market.

He sees a price growth of 8% this year, and has predicted that the market is on course for a boom in the next two to three years.

He said lower interest rates and easing of credit criteria by lenders were helping to stimulate the ­market.

However, he said: “The only ­concern is that banks seem to be lending money to people who ­really do not need it, and in the process they’re cutting out a lot of people who actually need the ­money to get their foot into the market.

“To minimise the risk of people not valuing their investment, banks should offer 95% bonds ­instead of full bonds.

“When buyers have to put equity in, they’re less likely to default ­because that would put their own money at risk.”

Mortgage originator Ooba ­also sees modest prospects and has projected a growth of between 4% and 5% in prices this year.

The firm’s CEO, Rhys Dyer, ­believes the high household-debt- to-disposable-income ratio and the ­fragile state of the labour market due to massive job losses are ­impacting negatively on demand for property and house prices.

“Debt-to-disposable-income ­levels, although off their highs from last year, are still sitting at 78%, compared to levels of 60% in 2005.

“With little further impetus ­likely to occur in 2011 from reduced interest rates, the debt-to­disposable-income ratio is likely to remain sticky at current levels,” Dyer said.

Homeowners who want to raise debt off the value of their ­properties are required by credit legislation to pass the ­affordability test before they are granted loans.

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