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Cape Town - The devastating drought and depreciating rand are twin terrors for the residential property market, especially for homes in lower income communities, according to David de Waal, CEO of Steeple Estate Agents.
This is because lower-priced homes tend to be financed with debt to a greater extent than higher-priced properties. Higher interest rates could, therefore, have a greater impact on the lower-priced segment.
"The drought will cause food prices to surge, especially since replacement imported products will have to be paid for with our weak currency," he said on Friday.
He explained that higher food prices will mean lower disposable incomes for buyers, reducing the probability of obtaining bond finance from banks.
"Higher prices will also push up inflation which, together with the woes of the currency, may very likely lead to an increase in interest rates in SA - further reducing the likelihood of people qualifying for bonds and putting additional financial pressure on existing homeowners," he said.
In the short term he expects the property market in smaller farming towns to be affected first, because these towns rely heavily on agricultural production to drive their economies.
"We have already seen that the poor economy and loss of confidence in the country's leadership have resulted in buyers becoming far more wary about committing to buy a property, and this trend is likely to continue," said De Waal.
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At the same time John Loos, household and property sector strategist at FNB Home Loans, said the latest FNB Property Barometer shows a broad picture of relative weakness in the high end of the residential property market, notably the high net worth segment.
The previously strong middle-income area segment also seems to have been showing signs of weakening through 2015.
Loos said the barometer shows that the lower-income area segment has actually been the relatively strong part of the market.
"The driver of relative higher end weakness is a 'back to basics' approach by a rising percentage of households, it would appear," said Loos.
This is reflected in a slowing in the pace of upgrading to better properties, along with a rise in the pace of downscaling due to “life stage”.
"While the high rate of downscaling due to life stage is not theoretically driven by financial stress, it is highly possible that the rising costs associated with homes have been encouraging ageing households to 'speed up' their rate of downscaling," said Loos.
The steadily rising costs associated with owning and running a home include the higher 11% property transfer duty bracket kicking in at a property value of R2.25m and above, weaker economic and household sector disposable income growth in recent years, rising interest rates and steadily increasing municipal rates and tariffs.
"These cost increases play into the hands of the cheaper and smaller-sized segments of the market. This is expected to see the lower-income area segment remain relatively stronger than the higher segments in the near term," said Loos.
"However, this is not to say that this segment won’t also weaken. To the contrary, it can’t defy economic gravity indefinitely, and the economy remains on a deteriorating path."
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