house prices up despite concerns
10 April 2007

The median house price rose marginally in March to R580 000 from R570 000 in February, recording a 1.8 percent month-on-month growth; and year-on-year growth moderated modestly to 8.4 percent from 8.6 percent in February, the Standard Bank Property Gauge showed.

The five-month moving average rate, which is one of the measures used to represent trend growth, remained flat at 7.7 percent in March from 7.6 percent year-on-year in February.

"Serious concerns about the health of the US housing market and the impact on local house prices have prompted speculation that house prices are likely to feel the impact of the housing market deterioration in the US," the banking group said.

It added that losses in the US housing market, especially the so-called "sub-prime" market, which comprised mortgages to borrowers with small deposits, bad credit histories or no proof of income, were now starting to surface.

Given the state of the US economy, concerns are being expressed about the possible outcome of a meltdown in the sub-prime market on the rest of the housing market and the wider economy. More importantly from a South African perspective are the likely consequences of these developments for the local residential property market.

Higher interest rates and slower wealth growth now obviously make it more difficult for households to repay their debt. In some markets like Honolulu, Las Vegas, Southern California, Washington DC, and much of Florida, mortgage payments account for more than 30 percent of income (the national average is 16 percent). In California, one in five mortgage holders pay more than 50 percent of their gross income. Clearly, this is a problem, said Elna Moolman, senior economist at Standard Bank.

In 2006, loans granted to the sub-prime housing segment accounted for 20 percent of all new mortgages in the US, compared to only five percent in 2002. However, these loans make up a small part of the overall mortgage market, making up 14 percent of outstanding mortgage loans (from six percent in 2001).

"The increased importance of this sub-prime mortgage market suggests increased risk in the total mortgage market; furthermore, there has been a decline in the quality lower segment mortgages. The "low loc" tier of this market, where borrowers don't have to provide proof of their income, rose to 44 percent in 2006 from 25 percent in 2000," she said.

At this stage, the cooling-off in the housing market has negatively impacted mainly output and employment growth in the construction industry. This relationship between economic strength and the housing market's performance is clearly illustrated by the regional spread of non-performing sub-prime loans; the recent surge in non-performing mortgages has been heavily biased towards states suffering from economic shocks, such as job losses and hurricane Katrina.

Moolman said: "Local house prices are unlikely to be affected materially by the lower-segment housing crisis in the US. Local house prices are driven primarily by local economic factors. Linkages between different countries' property markets are typically weaker than the relationships between other types of assets such as shares.

"The simultaneous increase in house prices across the globe in recent years, was largely attributable to lower interest rates and strong economic and income growth in these countries, rather than a pure herd-like increase in investors' appetite for property investments.

Despite South Africans' debt to income ratio (the ratio of households' total outstanding debt to their annual income) reaching a record high of 73.8 percent in the final quarter of last year, their debt instalment to income ratio is still noticeably below historical peaks given structurally lower interest rates.

This suggests that South Africans are still able to repay their existing debt, and hence are unlikely to accept lower house prices, which, in turn, suggests that nominal house prices are unlikely to fall.

Moolman said that the key channels through which the sub-prime market can impact on the South African housing market and economy were slower US growth may hamper local exports and commodity prices, which, in turn, may hamper house prices through reduced economic and income growth.

I-Net Bridge, www.business.iafrica.com