Homes recovery will 'run out of steam'

Johannesburg - House prices are still rising by double-digit rates, but the recovery will slow down as it becomes harder for buyers to afford homes.

The First National Bank (FNB) House Price Index on Thursday showed residential property prices increased by 12.6% year-on-year (y/y) in June, up from May's 12.2%. The real growth rate for May was 7.2% y/y.

However, FNB said the pace at which house prices are rising will slow to single digits by the end of the year.

"Affordability improvements provided the stimulus for the residential demand recovery," said FNB housing specialist John Loos.

According to Loos, affordability is crucial in a market where essential buying - as opposed to investment, leisure and speculative buying - dominates and the household sector remains financially stretched.

The index reported it will become harder to buy a home as houses are becoming more expensive and wages are increasing at a slower pace. FNB also cited the slowdown of interest rate cuts since August 2009.

"In an environment where it's largely about essentials and affordability, a lack of further affordability improvements should mean an end to the demand acceleration," said Loos.

Households still feeling the pinch

The index reported the real cumulative increase in the FNB House Price Index has been 70.4% from June 2000 to May 2010. The average price of homes included in the index was R793 152 in June.

Absa said on Wednesday that households remain under financial pressure. According to Absa's Mortgages Advances report, the growth in mortgage advances slowed further in May.

Commercial and residential mortgage loans increased by 3.4% y/y to R1 021.4bn in May 2010, from 3.6% growth in April.

"Further job losses occurred in the first quarter of 2010, while the ratio of household debt to disposable income remained relatively high at 78.4% in the quarter," said Absa senior property analyst Jacques du Toit.

In FNB's household credit report on Wednesday, Loos said South Africans should not "bluff themselves" into thinking the recession is a thing of the past, despite property demand being higher than a year-and-a-half ago, and both the economy and household disposable income once again growing positively in real terms.

"As quickly as interest rates can decline, so they can and will rise again at some stage in future," said Loos.

According to Loos, if interest rates are hiked suddenly in the near future, the household sector is at risk as households are still highly indebted.

 - Fin24.com