litany of woes hits residential property market
28 May 2008

A long list of negative influences is likely to result in a 21 percent drop in the value of new mortgage loans and readvances this year, from the R376 billion granted last year, according to First National Bank (FNB) property strategist John Loos. "It's hard to remain optimistic about the residential sector," he said, forecasting a period of price deflation, that is, falling prices.  "New loans have been in negative territory since mid-2007" and house prices would follow this trend, ending in year-on-year deflation of 7 percent in the second quarter of next year.

Prices would recover only in the second half of next year.

His long list of negative influences includes "rising interest rates and inflation, a slowing economy, the impact of the National Credit Act, post-Polokwane jitters, Eskom, crime, Zimbabwe, and now xenophobic violence".

"In FNB's first-quarter property barometer survey, we saw a small uptick in the percentage of sellers selling to emigrate, from 9 percent to 12 percent, and a more significant jump from 13 percent to 18 percent in the case of high-net-worth sellers."

His comments come ahead of a Reserve Bank meeting next month to decide whether to raise the repo rate from 11.5 percent. Increases of 4.5 percentage points over the past two years have raised monthly mortgage repayments by 32 percent.   The recent decline in the sector followed "one of the greatest residential property demand and price surges on record, which peaked in 2004", said Loos.

The situation deteriorated as the cost of servicing debt rose from 6.3 percent of household income at the end of 2003 to 7.6 percent in the second quarter of 2006 as house prices rose. "Given the subsequent interest rate increases the debt service ratio had reached 11 percent by the end of last year, and is probably on its way to 12 percent."  He pointed out pressure on home owners also came from rising food and fuel prices.

He said 2010 would be "an important driver of sentiment, which will slow the rate of emigration from the suburbs".
 
Ethel Hazelhurst, www.busrep.co.za