Business

Residential property bounces back

2 March 2010

South Africa's home market is arguably past its worst as demand grows off the dismal lows of early 2009 and the acceleration in house price inflation continues, says FNB.

The FNB House Price Index showed a further increase in year-on-year inflation, from a revised 3.6% in January to 5.8% in February, FNB property strategist John Loos said in a statement on Monday.

This remained largely the result of the big 2009 interest rate cuts, and some moderate bank easing of lending criteria, although a gradually improving economic growth rate should be starting to make a positive contribution too.

On a cumulative basis, this implied an 11.1% rise in the index since June 2009 - June 2009 being the low point in the recent recession-driven price slump.

Market health

"But, despite encouraging signs, the question is how healthy is the market really? A good way to describe the current state of the market could be to compare it to an Everest expedition," Loos said.

The expedition had recently summited, conquering the toughest and most dangerous part of the mountain, and was now on its way down to safer places. But the climbing party still remained in the notorious "death zone".

The "leading indicator" of improving market health had been the return to positive nominal house price growth.

But this alone was an insufficient indicator of good health in the market.

"We want to be sure that residential demand is moving back into line with supply. Possibly a better indicator of this is the estimated average time of properties on the market, as provided by FNB's Property Barometer survey," he said.

"Here, our view is that the market will probably have exited the death zone at the stage when the average time of a property on the market prior to being sold declines to below three months, while less than two months would signal the ultimate return to safety and good health."

The 4th quarter 2009 barometer survey put this average time on the market at 13 weeks and two days, almost at the three month mark and steadily declining.

Further confirmation that the market was exiting the death zone, and getting back to a point where demand was sufficiently robust to exceed supply, would be a return to "real house price" inflation.

Adjusting the January house price average with the most recent consumer price inflation number, the FNB House Price Index showed -2.4% year-on-year deflation, less than the previous month's -4%, and now perhaps a month or two away from a resumption of positive real price inflation - a further source of encouragement.

"And so, as time passes, an increasing number of economic and property indicators are approaching their 'critical' levels as the market strengthens."

Economic recovery

Many questions still remained regarding the sustainability of the global economic recovery, and thus SA's own economic and property recovery, while last week's Eskom tariff hike announcements were bad news for the market.

However, for the time being the positive impact of last year's interest rate cuts continued to feed through into the residential market, while positive economic growth should be having something of a positive impact on household sector disposable income.

"As such, we remain of the view that our moderate, but improved, average price inflation forecast of eight percent for 2010 as a whole can be achieved.

"For now, therefore, it would appear that the market is on the verge of exiting the notorious death zone," Loos said.

Sapa