South African property market overview

Category News

The performance of and prospects for the residential property market will continue to be closely related to economic growth, employment and income growth, property running costs and living costs in general, interest rates, consumers’ credit risk profiles, consumer confidence and banks’ risk appetite and lending criteria.

According to the Absa Housing Review Q3 2013, these factors will impact the affordability of housing and mortgage finance and will be reflected in property demand and supply conditions, price trends, market activity, buying trends, transaction volumes and the demand for mortgage finance.

Property market overview

Jacques du Toit, Absa Home Loans property analyst says nominal year-on-year (y/y) house price growth improved in Q2 2013 but in some segments of the market price growth peaked and is slowing down.

He points out that the first five months of 2013 saw levels of residential building activity rising by more than 10 percent compared with a year ago.

The volume of building plans for new housing approved by local government institutions increased by 11.3 percent y/y to 21 583 units from January to May, largely driven by the segment for flats and townhouses, which posted growth of 43.7 percent y/y in plans approved.

Du Toit points out that the construction phase of new housing saw growth of 8.6 percent y/y to 17 878 units in the five months up to May, with the segments for smaller-sized houses (below 80 square metres) and flats and townhouses the main contributors.

Based on the factors of affordability and changing lifestyles, the focus of the demand for and supply of new housing was largely on smaller-sized houses and higher-density flats and townhouses over the years.

As a result, over 800 000, or more than 73 percent of all new housing units built since 1994, were in these two segments of the market, he explains.

“The mortgage market remained subdued against the background of economic trends, the state of household finances, consumer credit-risk profiles, banks’ risk appetite and lending criteria, consumer confidence and residential property market conditions in general,” he says.

As a result, he notes that the value of outstanding household mortgage balances continued to show low growth of around 3 percent y/y in the first half of 2013 to a level of just above R800 billion, after similar growth in 2012.

He points out that the household mortgage debt-to-income ratio (outstanding household mortgage debt as a percentage of annual disposable income) was slightly lower at about 39.5 percent in Q1 2013 from 39.8 percent in Q4 2012 – the net result of quarter-on-quarter growth of 0.6 percent in household mortgage debt and growth of 1.3 percent in nominal disposable income.

“With the variable mortgage interest rate currently at a level of 8.5 percent per annum, monthly repayments on mortgage loans are in general 35.9 percent lower compared to early December 2008, when the mortgage rate was at a level of 15.5 percent per annum,” says Du Toit.  
According to the report, continued low mortgage interest rate is beneficial to the affordability of mortgage finance, supporting the demand for housing and consumers’ ability to take up credit to buy property.

Buy-to-let market

According to the Tenant Profile Network (TPN) data, the shortage of rental stock in the residential market has increased in line with still relatively low levels of residential building activity since bottoming in 2010 and a low number of buy-to-let residential property transactions being concluded compared with a few years ago.

TPN notes that a total of 71 percent of residential tenants paid rent on time, 3 percent paid in the grace period, 10 percent paid late, 8 percent made a partial payment and 8 percent did not pay at all in the first quarter of 2013.

Furthermore, TPN says buy-to-let investors, have to deal with the aspect of property yields against the background of currently relatively low capital appreciation and rising running costs (municipal rates and taxes, electricity tariffs, maintenance, security) as well as consumers renting these properties, are impacted by economic trends (inflation, interest rates) and challenges with regard to personal financial circumstances (employment, income, consumption, savings, credit-risk profiles).

“These factors are most likely affecting investor demand for buy-to-let property, while TPN has found in recent research that the average age of tenants increased from 27 years to 31 years, which serves as an indication of the possible impact of the abovementioned factors on homeownership and property investment.

The household sector

Trends in household sector finances will continue to be driven by macroeconomic factors such as economic growth, employment, inflation and interest rates, points out Du Toit.

The following trends are expected in household sector related variables in 2013:

  • Employment growth of 0.9 percent is forecast after growth of 0.6 percent in 2012.
  • Growth in real household disposable income is expected to slow down to 2.6 percent from 3.8 percent in 2012, affected by upward pressure on inflation and only moderate employment growth.
  • On the back of a continued low level of savings, real household consumption expenditure growth is projected at 2.6 percent (3.5 percent in 2012) and is expected to remain closely correlated with income growth.
  • Household consumption expenditure is forecast at 60.7 percent of GDP in 2013 (60.4 percent in 2012), implying that the household sector will remain an important part of the economy and driver of economic growth.
  • With lending rates forecast to remain low for longer and levels of saving not expected to show a substantial improvement, the household sector will continue to largely rely on credit for funding consumption expenditure, with the result that the debt-to-income ratio will remain above the 75 percent level after being at 75.6 percent in 2012.
  • The cost of servicing household credit as a percentage of disposable income is forecast to remain under control in view of continued low interest rates and a relatively stable debt-to-income ratio.
  • The credit-risk profiles of consumers are not expected to show a significant improvement from current levels, impacting the accessibility of credit and household consumption expenditure. – Denise Mhlanga

Author: Property 24

Submitted 12 Sep 13 / Views 8292
  • 1
  • 2