According to the FNB House Price Index, house-price inflation is slowing and the decline in year-on-year growth signals the start of a slowing trend in house-price inflation.
So capital appreciation on properties looks to be sluggish in the short-to-medium term, at least.
House-price growth dropped to 10,6% last month from 12,4% in June.
The South African Reserve Bank has not provided any short-term stimulus for residential property. In the long term, this will probably mean a more stable residential market. But what does it mean for the property market now?
Jacques du Toit, senior property analyst for Absa Home Loans, has this advice to offer: “Because the demand for mortgage finance is low, and because we are seeing high levels of debt, consumers are understandably cautious. It doesn’t mean that they shouldn’t buy now — in fact, they may want to do so before an anticipated interest-rate hike next year — but they need to know that, when they apply for credit, they should not buy on the limit.
“They need to be sure they can afford to pick up further credit, particularly in light of the fact that maintenance, rates, taxes and levies are all going up. Running a property is going to be more expensive.”
FNB home loans strategist John Loos agrees. “Consumers need to be able to absorb the costs once interest rates go up. In view of previous cycles of 17% prime and 15,5% prime, we’re really looking at a benchmark of about 15% prime, which must be taken into consideration now, despite the fact that rates are low.”
Du Toit’s tip is for consumers to buy a smaller, more affordable property. “You don’t have to stay in it for ever,” he says. “In fact, you may want to invest in buy-to-let property. Though bear in mind that, in many cases, this has not covered the mortgage repayment of late — a red flag to be aware of.”
Loos says that although rental yields are not yet wonderful on average, agents are saying there has recently been is an improvement here.
Loos also points out that there are a number of distressed sellers putting their homes on the market, so discounts can be found.
Du Toit and Loos do not see the market contracting, but Loos agrees that the risks are high, given all sorts of global economic woes. Both agree that there will be “no fireworks” for at least a year or so.
“Right now, employment is under pressure and businesses will want to see an improvement in trading conditions before taking on more staff,” Du Toit says. “There is always a lag between the pick-up in employment and recovery, so we may only see improvement in 2011. In the meantime, consumers will approach taking up further credit very conservatively.”
“We are of the view that the latest decline in the FNB House Price Index’s inflation rate is the start of a slowing trend in what we term a ‘mini-cycle’ for residential property,” says Loos. “Good inflation numbers make the chance of a rate cut quite good, but the slow pace of movement by the SARB since August 2009 makes it unlikely that further interest-rate stimulus would be meaningful for the residential property market in the near term.”
Pam Golding’s Andrew Golding is bullish, however, particularly with regard to residential property funds. “The current circumstances are favourable for investment in such funds as interest rates are at the low end of their cycle and inventory stock levels are high. As a result, the propensity for keen purchasing is good, potentially locking in early capital growth.”
He pointed out that rental yields are likely to increase off their current low levels and capital growth “of a reasonable nature” over the next five to seven years is a possibility.
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