Property industry braces for 'deep, drawn out' recession to hit housing market

(iStock)
(iStock)

The coronavirus may not hit the SA housing market very hard in terms of price declines, but sales volumes in the upper price band will take the heaviest blow, industry experts have said.

Times of heightened uncertainty are associated with low confidence, and an unwillingness to spend on big-ticket items. Preliminary deeds office data shows market volumes have already declined by an estimated 40% year-on-year. 

The higher end market remains in excess supply, while the bottom end is still in structural supply-deficit, states the latest FNB Property Barometer, released on Thursday. 

"We expect these dynamics to play a crucial role in determining house price paths this year," says FNB property economist Siphamandla Mkhwanazi.

"We expect mass job losses and heightened uncertainty to result in a sharp drop in transaction volumes, as buyers delay their purchasing decisions."

Earlier this week, the SA Reserve Bank cut the repo rate by 100 basis points, or one percentage point, bringing SA's repo rate to 4.25%. At the same time, the central bank's latest projection for SA's economy is to contract by 6.1%. 

The FNB House Price Index (HPI) for March show that house price appreciation slowed to 2.8% y/y in March, the lowest print since May 2011. The impact of the lockdown on volumes and prices is yet to reflect in the data.

The latest FNB barometer report says search engine data shows a rebound in web traffic to property portals in SA since lockdown.

While too early to definitively draw conclusions, the report says this could be an early indication of burgeoning bargain hunting by investor buyers and/or pent-up demand from first-time buyers looking to capitalise on potential distressed selling.

FNB expects Covid-19 will have a sharp but short-lived impact on SA's housing market.

Highest prices, biggest bleed

FNB forecasts that the biggest decline in nominal house price growth can be expected in the upper end of the housing market.

Samuel Seeff, chair of Seeff Properties, anticipates that buyers in this upper price band will likely remain in the same "holding pattern" seen over the past 18 months.

"This [is] even though buyers can negotiate strongly in this sector of the market, up to 20% and more off the asking prices," says Seeff.

As for house price growth in the low- and middle-priced segments, Mkhwanazi expects this will likely slow too, reflecting already pre-existing weakening fundamentals in the market, now amplified by the coronavirus pandemic.

"We expect higher-priced segments to fall deeper into negative territory – a nominal price decline – due in part to excess supply and heightened uncertainty. Middle segments are also expected to slow, and register sub-1% price growth, mainly due to weakness in labour markets," he told Fin24.

"The low-priced segment will also slow significantly, as consumers here are highly sensitive to economic shocks, but is expected to perform relatively better compared to other segments due to stock shortages and the relative immobility of property owners in this segment. We expect growth here to be slightly above inflation," he said.

Sudden fears

According to Mkhwanazi, the coronavirus outbreak has driven sudden changes in behaviour among home buyers and sellers.

Anecdotal evidence suggests that fears around the impact of the virus and how long it will take to contain have led some sellers to take their homes off the market.

From the buyer perspective, restrictions on human movement, and "avoidance behaviour" in general, have reduced the number of buyer enquiries.

Property economist Erwin Rode, of Rode and Associates, says SA is currently in a three-layered recession. Over the past 12 years structural impediments have led to a deceleration in economic growth, he says. At the same time, SA has been in a "normal" cyclical downswing as well – and then came the impact of Covid-19.

'Deep and drawn-out' recession

"This is, therefore, not a normal recession – it is going to be a deep and drawn-out affair.

"The implication for the property market is that few transactions will take place for a long time as a result of persisting low confidence levels," Rode told Fin24.

"Incomes will be eroded and forced sales will become more common as consumers lose their jobs and are forced to accept wage and salary cuts. It is a catastrophe for estate agents and brokers."

Seeff says a decline in sales volumes can already be observed, following the weakening of the economy over the last year, and he expects this will persist.

No cash flow

Dr Andrew Golding, chief executive of Pam Golding Properties, says the reality is that the closure of the Deeds Office during the lockdown has effectively terminated cash flow. While the industry is still operating in some way, this also means that, until such time as property transfers can take place, real estate agents and agencies are unable to generate any revenue.

"Where the market will be [after] this crisis is really anyone's guess, but the hope is that there will be pent up demand from transactions that were already in progress," according to Golding.

"A potential negative for the property market, however, is that a severe recession and resultant increase in unemployment will generally make both buyers and sellers worse off and, therefore, hamper the property market other than where there is distressed selling speculative and buying."

He foresees that this would represent a significant headwind to the housing market and is likely to persist until such time as the economy starts showing early signs of recovery.

"Having said that, however, given the extreme volatility currently being experienced in global stock markets, it is probable that, as has been seen in past times of great turmoil, one could ultimately see an increased confidence in bricks and mortar among investors and home buyers," Golding noted.

Seeff expressed a similar hope for recovery. "We believe […] that the Covid-19 lockdown emergence phase will be characterised by pent-up demand in the primary residential market as buyers are eagerly waiting to take advantage of market conditions, especially in the sub-R1.5 million – up to R3 million in some areas – sector," he said.

"We are not saying volumes will spike drastically, but we expect a level of demand to be there. Our branches have already done deals 'virtually' with price agreed, but the offers are subject to physical viewings once the lockdown lifts."

Caspar Lee, co-founder of Proper Living, specialising in student housing development, expects buying behaviour will change, but believes there is room for recovery. 

"Confidence is low, but there is relief in knowing that investment in the property market is still one of the better investments to make. In a time of crisis, it's a high risk-high reward situation," he said.

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