Residential Market Review

This was shared with me from Inge de Klerk of Pam Golding Properties. Written by Stuart Murray – Co-founder and former editor of Finance Week magazine, the Review provides comment on, inter alia, the increasing average home purchase price, increased sales volumes and stock shortages in the residential market of South Africa.

The housing market has shown considerable improvement since the start of the year and is indicating consolidation of this rising trend, both in increased sales volumes and rising values. Overall first quarter results in April will confirm this steady upward progression.

Pam Golding Properties CEO Dr Andrew Golding reports: “Results to February 14, the end of our financial year, indicate sales by value are up 25%. We have had an excellent year, significantly exceeding budget.”

Mortgage originator ooba says that in February the average home purchase price increased by 5,4% year-on-year.
The buyers’ market of the post-recession years has turned, quite dramatically, to a sellers’, emphasised by widespread stock shortages. The backlog of unsold homes on the market is fast being absorbed, Dr Golding notes.

According to the latest FNB House Price Index the average house price for February rose 8% year-on-year. The bank’s Market Strength Index also points to further strengthening of the housing market. The bank’s property sector strategist John Loos comments: “The combination of 8% house price growth and a slightly higher prime rate should continue to keep the market by-and-large healthy…” Loos adds that over all “it still appears to be a case of a well-balanced market, largely free of irrational behaviour despite being propped up by a very weak and unbalanced economy.”

That the market remains solid is underlined by the Reserve Bank’s most recent report of property transfer duty revenue which in January reached a 49,4% year-on-year growth rate on value (see graph)

Transfer Duty Revenue Graph

 

Access to mortgage finance is still the main stumbling block to a significant overall revival, coupled to a host of negative influences on households such as poor income growth and ever-rising costs, complicated by transport, electricity, municipal rates and utilities charges . The unexpected 0,5%interest rate increase which brought the mortgage (prime) rate to 9% also shook consumer confidence. Absa Bank cautions: “Against a background of persistent financial pressure, consumer credit-risk profiles continued to deteriorate up to late last year and adversely affecting access to credit.”

Nevertheless, the granting of new bonds is on the up and up, According to Standard Bank: “Household mortgage balances have improved of late, with this momentum boding well for household demand.” Ooba reports that there has been a sharp fall (5,6%) in the average deposit required by banks.

The credit squeeze remains with us; however, a new, powerful, influence is beginning to direct the housing market – that of shortage of stock. In 2011 stock shortages as cited by agents was virtually nil; this has risen to a national average of nearly 20%, with a number of “hot spots” – Cape Town for example – where stock constraints are having the effect of pushing up house prices. Similarly in KZN, where, according to Carol Reynolds, PGP’s area principal in Durban, Durban North and La Lucia, the 2014 housing market has begun “with gusto”, adding “most of the metro areas are seeing stock shortages and there is a resurgence of buyer activity. Correctly priced properties are selling within the first few weeks of being listed.”

Laurie Wener, PGP’s MD for the Western Cape region, comments that the rise in the property market has resulted in a shortage of stock in most areas. “The middle residential markets in the Southern Suburbs and on the Atlantic Seaboard and City Bowl, between R4 million and R9 million are extremely buoyant with a high percentage of cash sales – over 60%.

“The return of the international buyer and property investors has stimulated interest in apartments, transforming a substantial excess of supply in stock since 2007 to an acute shortage over the past 12 months, especially in the V&A Waterfront and all along the Atlantic Seaboard, the City Bowl and Central City.”

Jonathan Davies, joint manager for Hyde Park, PGP’s main office in Gauteng, says that the shortage of stock sometimes results in homes being sold above asking price due to competing agents, particularly in the lower and middle segments of the market. Owners in more elite suburbs have been able to pick their time to sell.

He adds: “Shortage of stock has put pressure on estate agents without the strength of a brand.”

These stock shortages are partly the result of a badly-underperforming building industry over many years which has only recently got back on its feet again in terms of residential building activity – and then mainly in the development of flats and townhouses. Cost pressures, of course, including the rising cost of land, have played a significant part in the industry’s woes and this has resulted in the cost of new houses far exceeding that of existing homes. This in turn increases demand for existing houses. Latest statistics to hand from Absa show that it is 33,8% cheaper to buy an existing house than a new one – but that the gap is narrowing.

A “bubble” is when market prices rise way beyond where they should be in terms of the economy and other fundamental indicators.

While Britain’s “Help to Buy” scheme is intended to support the building of 10 000 new homes,the UK government is now under pressure to further assist the building sector. Shadow Chancellor Ed Balls has urged his Conservative counterparts to cut the “Help-to-Buy” guarantee to 400 000 pounds sterling and use the balance to give small and medium builders better access to finance.

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