House prices up, but doubts remain

Johannesburg – It may look like there's no stopping residential property sector growth - but banks are warning not to expect fireworks from house prices this year.

Absa's home loans department on Monday reported an increase in house prices in all segments of the market (affordable, middle-segment and luxury) in the first quarter of 2010. According to First National Bank's (FNB's) Property Market Analytics, April was the first month in two years with double-digit house price inflation.

FNB's house price index reported an increase to 10.1% in April, from 8.1% in March. The average house price in the index was R790 087.

However, Absa property analyst Jacques du Toit expressed conservative expectations for house price growth in 2010. 

"Households are still not out of the woods," he said. "Normally we see the household/debt ratio come down, but this hasn't happened yet."

The ratio of household debt to disposable income increased to 79.8% in the fourth quarter from 78.4% in the third quarter.

This is in part due to mediocre income growth, and households have limited scope to grow their borrowings. Du Toit estimates house price growth will be between 6.55% and 7% (nominal).

The house price recovery is attributable to interest rate cuts, a total of 5.5 percentage points to date, said FNB's home loans strategist John Loos.

"This was a major stimulus for the current property recovery," said Loos. "New mortgage loans and re-advances... started increasing in response to interest rate cutting."

But Loos expects a "lack of further demand stimulus" this year. "This may be instrumental in slowing the pace of acceleration in growth of the economy."

The South African Reserve Bank Leading Business Cycle Indicator, which typically is well correlated with trends in new mortgage loans granted, reported a third consecutive month of decline in February.

"This could suggest early signs that the resurgence in new mortgage lending is heading to a peak in coming months," said Loos.

Last week Absa's mortgage advances inched higher from 0.4% in January to 0.7% in March.

“While demand is recovering, loan applications are still nearly 50% below the typical volumes received at the peak of the property cycle in 2007," said Standard Bank property economist Johan Botha.

According to the Standard Bank measure, the median price financed dropped by 11% from a peak in June 2008 to its September 2009 through. This decline was intensified by the impact of the National Credit Act, which imposed tighter credit criteria on banks, said Botha.

Despite the gloomy outlook, Luthando Vutula, managing executive of Absa home loans, announced on Monday Absa wants home buyers to put down a deposit of at least 15% of the value of the property.

Vutula said 100% home loans will still be granted, but the bank will be highly selective about recipients. Absa clients will receive preference as decisions will still be based on client risk profiles.

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