Property market pinch to relax next year - FNB
September 18, 2007
By Ronnie Morris
Cape Town - An extended slowdown in the residential property market, based on a soft global landing, was expected in the near term as the National Credit Act (NCA) bit on top of increased interest rates, First National Bank (FNB) strategist John Loos said yesterday.
However, Loos told the Rode property conference near Stellenbosch that the rise in interest rates was believed to be close to its peak and economic growth was expected to pick up next year.
This would cause a recovery in house prices.
The teething problems of the NCA were expected to diminish over time, with better credit growth to resume off a new, lower base.
Construction sector capacity constraints were expected to fuel higher building costs, while land price inflation was expected to be high.
Loos said that 47 percent of industry professionals claimed that applicants were struggling to qualify for homes, while in the lower segment of the market 67 percent claimed that financial qualification was a significant hurdle.
He did not, however, believe the lower end of the market would perform more poorly. While affordability was a factor, the upper end of the market was taking strain.
About 75 percent of sellers were unable to obtain the asking price for their properties, while the average length of time a property spent on the market had increased from five weeks to 10 weeks.
Loos did not believe there was a property bubble. What was happening, he explained, was a normalisation of the market, where residential property was still cheap.
Dries du Toit, an independent investment adviser, said the decade to date had been South Africa's best yet, where the main macro investment drivers were: the structural break in inflation, higher commodity prices and prudent monetary policies.
The easy money had been made and property confidence was topping out. Expected returns from property would slow significantly and house price growth was expected to retreat to single digits this year.
Listed and commercial property was expected to show total returns of more than 10 percent if the country was close to the top of the interest rate cycle.
The medium- to longer-term economic backdrop was still very favourable relative to the historic 30-year average experience: economic growth would be higher, inflation would be lower, the black middle class would underpin the economy, the infrastructure boom would last for many years and the 2010 soccer World Cup would be the acid test for the remaining sceptics.
Erwin Rode, a property analyst and host of the Rode property conference, said that as far as office rentals were concerned, there were no more office vacancies left in South Africa and rentals were driven by building costs and vacancies.
To make new office developments viable, one required a rental of R130 per square meter a month, while they were at R90. Industrial properties were in the same position as offices.
Rentals, which had already taken off in Sandton and the Johannesburg central business district, were poised to do the same elsewhere, he said.
Another phenomenon was that shopping centre developers were targeting smaller towns and wealth was now, after a lag, trickling down to lower-income groups through job creation.
Rode cautioned that inclusionary housing - where developers that build on state land have to add a low-cost portion - could have unintended consequences that affect the supply side, in which case house prices would shoot through the roof in the next few years.
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