Property growth in the range of 4-6% is now very much in line with inflation and going forward the market should be driven by two things – what consumers think they can afford and the liquidity available to them.
Consumers are facing new hurdles all the time, from a threat of a ratings downgrade to one of the most severe droughts in our history.
Affordability is being challenged beyond interest rates – by electricity increases, higher municipal bills and rising food and entertainment costs, among others.
Rising interest rates are expected to dampen the purchase of new properties even though we are still seeing nominal house price growth. Don’t underestimate the affordability hurdle in these testing times as broad-based concerns like rising prices for baskets of goods and job security begin to bite.
When things start to get tight, some people will feel they can still buy if barriers to entry are low. This is why it is important to watch the credit environment as loans are not going to be as affordable as they were and the growth in mortgage extension through higher loans to property values might flatten off a little.
However, it is clear most people are not looking to sell right now even if the equity they have in their properties flattens out – this is because they are investing for the long term. But those investing in the short-term could face cost challenges and they may find themselves a little trapped if they do not manage their portfolios effectively. Property investors certainly need to tread more cautiously in the short term.
Expect to see differences in values and availability across different geographies. Economic activity should be more robust in the bigger metropolitan areas, whereas towns that relied on industries like mining for their growth are likely to struggle. Current conditions dictate growth will happen in pockets of KwaZulu-Natal, the Western Cape and Gauteng but environments hit hard by the commodity slowdown could have a worse outlook.
Urbanisation remains a major trend that is helping develop new markets and opening the door to residential property expansion, but the weak economic conditions have skewed the data towards the bigger urban areas in terms of property price growth. Even in slightly tougher economic periods and slowing economic activity some locations will stand up better than others. The key is that there is still high demand and we could land up with areas that outperform.
The lower end of the property market can, however, be expected to perform quite well if located in areas where consumers continue to be employed and income is fairly stable.
Be careful not to be too fascinated about asset growth, however, as other aspects like how a property fits into your lifestyle and how easily accessible it is to work can save you money in other areas.
Those looking for capital growth from an investment perspective will still find good opportunities but they will have to do their homework to ensure they buy the right property in the right location.
Overall it is not a great growth story in terms of number of people bonding units, with market liquidity very much driven by loan to value.
Transactions costs remain the primary hurdle for many and further strain on consumer balance sheets could make even these transaction costs a bridge too far for some potential buyers.
In this environment a strong focus on risk management will be key, and as a bank we will continue with proactive cost management discipline while at the same time working to improve the lives of customers and offering effective solutions.
At Standard Bank we saw a 3% rise in mortgage loans during the 2015 financial year to R326bn, which reflects how the property market as a whole has definitely experienced a long base trend in which transaction volumes have been relatively flat, with higher values compensating for the weak conditions.
Our total income from mortgage lending rose 8% over the period. What was heartening was that mortgage loan credit impairments dropped to 0.66% from 0.79% in the 2014 reporting period, but non-performing loans did tick up very slightly to 4.5%. However, debt servicing costs remain under control.
In conclusion, don’t expect the bottom to fall out of the property market but for economic conditions to add pressure on many fronts. A proactive tone is needed around finances so home owners are more conscious about where their money is going. Consumers are generally not sitting with healthy cash buffers and the word “budget” stands out as the best way to begin managing the challenges.
