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PROPERTY: A Healthy Recovery Underway

 





Recent Gauteng Business News

House price growth increased modestly in April, rising to 2% y/y from 0.5% y/y in March, taking the median property loan financed by the bank to R571 000 from R550 000 in February. This growth remains modest in comparison to other indicators that are signalling a stronger turnaround in the appetite for mortgage finance. Notwithstanding this comparison, the median property value is slowly increasing following several months of lethargy around the R550 000 mark. The improved growth rate in April is a combination of healthier demand and supply dynamics. We believe that this growth rate reflects a healthy improvement in line with the current business cycle dynamics, as a steeper acceleration relative to economic activity is deemed risky during the early phases of the economic recovery.


A continuation of today’s trend will confirm that the bottom in the cycle has been reached. While monthly loan activity tends to be volatile, there has been a discernable improvement in the volumes of applications received of nearly three times compared to the bottom of the cycle in mid-2009. That said, while demand is recovering, loan applications are still nearly 50% below the typical volumes received at the peak of the property cycle in 2007. According to the Standard Bank measure, the median price financed dropped by 11% from the peak in June 2008 to the through in September last year. While the absence of historical cycles prevents a comparison with past cycles, this decline has undoubtedly been intensified by two extremes: on the one end, the impact of the National Credit Act (NCA), in which higher-income groups were favoured by their relatively positive asset-liability structures at the time of the implementation; and on the other end, the recent lending strategies focusing on the lower-end of the property market.

On the supply-side of the spectrum, loans granted have also recovered, and are now nearly four times the level of grants over the same period last year. Recent survey data from the Bureau for Economic Research (BER) and Ernst and Young point that banks expect to loosen credit granting criteria (on a net basis) in the second quarter of the year (from a mildly tighter lending bias), which will be the first time in four years. These expectations have been underpinned by a slowdown in the growth of credit losses and an improvement in the economic outlook. Clearly the slow improvement in nominal prices suggests that new lending is proceeding relatively cautiously.

This is a healthy rate of growth since; if the current trend in loans granted were to be sustained, house prices could grow by an annualised rate of 6.5% this year; or 1.3% in real terms. Any additional growth may turn to be unsustainable and risky given that the envisaged interest rate cycle has bottomed; household outstanding debt balances remain high; jobs growth remain relatively slim; and the potential economic repercussions for South Africa from deteriorating conditions in the Euro-zone economy cannot be ignored. Indeed, any risks that could derail the current income growth prognosis of households will be unsettling for the housing market and the economic recovery. Recall that real disposable income growth increased to an annualised rate of 2.7% in Q4 last year – the first positive growth rate in five quarters.

In line with our expectations for nominal income growth of around 8% this year, the Bureau for Market Research (BMR) expects 7.9%. According to the BMR, income growth is expected to be particularly strong in the upper-income bands, of 8.5%, 14.1% and 15.2% for individuals in the R300 000 to R500 000, R500 000 to R750 000 and above R750 000 income cohorts, respectively. This translates into overall real income growth of 2.1%, but for the upper income cohort, real growth of around 9.3% is likely, while the lower income cohort (earning below R50 000 per annum) could see negative real income growth of around 4.4%. There are two dynamics at play that support these trends.

Firstly, the income structure of high income earners, while more secure, is more diverse, as these earners derive between 20% and 40% of their income from other forms of income such as dividends and rent. In contrast, the lower income cohorts derive a substantial portion of non-employment income from other sources, such as old age pensions, social grants and alimonies.

Secondly, the labour absorption rates of skilled individuals have historically been higher during recovery periods. The lower income market has also been severely affected by the recession, which markedly lowers their earnings prospects. We anticipate that non-employment income (excluding social transfers and mixed income), which constitutes around 18% of total disposable income, should recover by between 6% and 8% this year after contracting by 2.6% in 2009. This supports real disposable income growth of at least 2.9% this year following a contraction of 2.8% in 2009.

Implications for house price growth: Given the bias towards higher income cohorts, it is generally expected that the median house price will reflect this accordingly. However, the impact of the marked reduction in interest rates during 2009 is expected to start fading this year, which suggests that economic growth will be the chief impetus for growth in house prices. In light of the aforementioned trends in credit supply, it is generally expected that the median house price will grow more strongly from the middle of the year onwards, since labour markets, as conjectured above, will have recovered. Moreover, historical trends comparing the behaviour of new mortgage loans granted for residential properties during downswings of comparable nature (i.e. 1989 -1993 and 1996 – 1999) reveal that the rate of new loans granted only starts increasing two-and-a-half years after the onset of the downswing. An official business cycle upswing typically saw the rate of new residential mortgage loans granted accelerate virtually exponentially relative to trend (see Figure 2). The current downswing (as at the end of 2009) has seen the worst rate of new residential loans granted, and is only in its 25th month of its cycle. If past lending behaviour is anything to go by, the rate of increase in new loans granted should start accelerating by June this year.

Outlook: The recovery in the median house price continues on a gradual path. A continuation of this trend could see growth of around 6.5% in nominal terms. While several risks to the outlook remain, we are confident that easier credit granting criteria and positive real income growth will underpin a constructive growth trajectory in the second half of the year. Lower interest rates in conjunction with consolidation in debt will underpin the affordability of the housing market. Moreover, with non-employment income envisaged to grow by between 6% and 8% this year, the median house price could be biased upward as new investment buying (e.g. buy-to-let) patterns emerge.


 
 
 
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