Homes trading again

AFTER AN ABSENCE of 18 months, it appears homebuyers are finally back in the market. Banks and estate agents reported a sudden flutter of buying activity in August and September. Pam Golding Properties (PGP) - one of South Africa's top three real estate groups in terms of turnover - saw sales rise 20% in August year-on-year, the biggest annualised jump reported by the group in 12 months.

Latest FNB Residential Property Barometer mirrors the same trend, with activity levels (show-house attendances) in third quarter 2009 back to levels last seen in mid-2007. More telling is perhaps the fact houses are now changing hands again at the same rate as they did 18 months ago.

FNB's survey shows the average time a house stays on the market has dropped by more than a month over the past quarter: from a record high of five months (148 days) in second quarter 2009 to just less than four months (116 days) in third quarter 2009.

Mortgage applications are also on the rise. Jan Kleynhans, CEO of FNB Home Loans, says the number of mortgage applications processed by the bank in September was double that of April this year, when FNB's approved mortgage volumes reached a four-year low.

The up-tick in home buying activity appears to be driven by a combination of three factors: lower interest rates, making monthly mortgage repayments more affordable; banks relaxing their deposit criteria, with 100% mortgages again available to some buyers; and the fact there's value to be had.

The value proposition is no doubt playing a key role for investors and homeowners wanting to upgrade. After all, as PGP CE Andrew Golding says, buyers are now paying at least 20% less than they would have when the market peaked in early 2008. If you're buying from a distressed seller or a bank repossessed property, the discount could be closer to 40%.

And the perception is that the window of opportunity to buy residential property at discounted prices may not be open for that much longer. Golding says it's unlikely prices will fall any further. Property economists agree.

In fact, FNB's John Loos predicts prices may even start rising again before year-end. FNB's house price index recorded a drop of -4,4% year-on-year from September, a marked improvement on August's deflation rate of -6,5%. Standard Bank's index recorded a drop of -5,2% in September, the same as in August, which Standard Bank economist Johan Botha says is indicative of price declines finally stabilising.

However, both Botha and Loos say a quick turnaround in house prices is unlikely. Loos expects house price growth to average 5% next year, which means in real terms (after inflation) prices will remain in negative growth territory. He notes interest rates may start to rise again in second half 2010, so house price growth is likely to remain muted for at least the next two to three years.

In fact, Loos says house price growth will probably never return to the double digits seen during the boom years between 2002 and 2007. "Those were extraordinary times that will not easily be repeated. Interest rates fell to record lows, which allowed SA to play catch up with the rest of the world's housing markets after almost two decades of hardly any growth.''

Loos says residential property investors will have no choice but to shift their focus from capital to income returns over the next few years. However, investors who entered the market at the start of the housing boom in 2002 are still sitting pretty. Despite SA experiencing one of its worst housing slumps ever over the past 18 months, FNB's figures show house prices are still up an average 20%/year (a cumulative 141%) in the seven years to September 2009.