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Johannesburg - Investors should forget about real (after-inflation) returns on residential property for at least the next two years, warns an Absa economist.
Jacques du Toit, Absa Home Loans' senior property analyst, says in his latest quarterly housing review released on Monday that interest rates will continue an upward march over the next few months, placing a further dampener on an already depressed housing market.
Du Toit says latest indications are that rate cuts won't happen before early 2010, as the SA Reserve Bank attempts to get rampant inflation under control. Housing sales and house price growth are therefore likely to soften further over the next 12 to 18 months, as households' financial positions come under more strain.
Says Du Toit: "Affordability for many prospective homebuyers, especially in the low- and mid-income categories, will become even more important and cause buyers to consider even smaller, more affordable and higher-density housing in future."
Du Toit notes that housing affordability levels have already deteriorated significantly since mid-2006, when interest rates first started to rise. Absa's mortgage repayment-to-remuneration ratio is in fact at its highest level in 18 years. That implies that mortgage repayments are now rising at a much faster rate than salaries.
Du Toit says investors should therefore not expect to achieve real capital appreciation on residential property over the next 24 months. However, an increase in demand for rental accommodation may see improved income yields on buy-to-let investments.
Absa's latest housing review shows that house price growth slowed to 9,5% in first quarter 2008 (year-on-year), down from 15% a year earlier. Du Toit forecasts nominal house price growth of between 5% and 6% for 2008, dropping to below 4% in 2009.
'Overly optimistic'
But some industry commentators believe that Du Toit's outlook is overly optimistic.
Rael Levitt, CE of auctioneers and property valuators Alliance Group, says house prices have already fallen an average 5% across SA's largest cities.
Levitt maintains that auctioneers are able to provide a more up to date picture of house price movements than banks and economists, as they deal with real-time transactions.
Levitt says the pain of the 450 basis points rate hikes since mid-2006 has only just started to kick in. He believes house prices will have fallen by another 5% by end-2008. And that's without any further rate hikes.
Says Levitt: "If rates rise again it will accelerate price declines. That's an ominous prospect because price falls can be infectious. If one house in a street sells for a lower than expected price, that can have a knock-on effect on other properties in the same area."
All levels feel pinch
More worrying though is the sharp rise in the number of SA homeowners who can no longer afford to hold on to their properties.
Levitt says there is no doubt that mortgage stress is spreading across all cities, suburbs and demographics. Although over-geared middle-income families are the most vulnerable, Levitt claims that wealthier South Africans are also feeling the pinch.
Alliance Group research shows that by September this year more than 55 000 South Africans will battle to meet monthly bond repayments if they don't refinance existing debt, with 8 000 likely to lose their homes in the process.
- Fin24.com