In real terms, however, adjusted for consumer price inflation, the year-on-year decline continues, to the tune of -2.8%  in March (April CPI figures not yet available), given that nominal house price growth was well-below the higher 4.1% CPI inflation rate.

However, the FNB Valuers Market Strength Index suggests that our valuers have started to see further deterioration in the strength of demand versus supply during April, after a some small signs of stabilization in preceding months of 2011. This weakening in the market balance is the combined result of a further strengthening in the supply of residential stock on the market during the month, along with a weakening in demand, according to the valuers’ combined opinion.

The contrast between the valuers’ combined opinion and a slight acceleration in year-on-year price growth suggests that, we should not expect too much from the slight rise in price growth. What is probably being reflected in the recent house price trend is the mild residential demand improvement late in 2010, which was the result of 2 late-2010 interest rate cuts. However, the last rate cut was 5-and-a-half months ago in November, and it is likely that the impact is starting to wear thin. So, while price growth usually lags demand trend changes, and we are only now seeing the impact of rate cuts in house price trends, the weakening Market Strength Index suggests that the acceleration in house price growth will probably be short lived for the time being.

Currently, the talk is about rising oil and food prices, rising consumer price inflation, from 3.7% in February to 4.1% in March, and the widespread expectation of interest rate hikes later in 2011. Such an event, we believe sustains the possibility of renewed house price decline, given the current weak demand relative to supply.

I stuck my head out recently when I wrote that inflation can be the property investors friend, and this of course is especially relevant when you are geared. The effect of a period of high inflation is that the capital amount owed to the bank becomes worth LESS in real terms than when you borrowed it. Also the rentals paid by your tenants will become cheaper relatively , providing room for you to escalate them. The replacement cost will also appreciate with inflation.

The downside to inflation is that interest rates are used as a first tool by the Reserve Bank to counter it, so rates are hiked to keep inflation within the government prescribed ratio, and that means we end up with a variable monthly cost which is very dangerous if you have not provided for it.

We can be pretty sure now that interest rates are on their way up. The banks have already made the assumption that rates will be increased by the end of the year by 0.5%, although SARB is still talking about early 2012.

Is there any way to negotiate a fixed rate from the bank?

My view is that I will not fix at this stage. Firstly I don’t believe rates will run like they did in the last cycle, because we are still over extended (our debt ratio is too high) and an increase of more than 2% will be extremely uncomfortable for homeowners. (John Loos – FNB Property Market Analytics 25 March 2011)

Secondly, we are already experiencing “cooling” measures that are not interest rate related as we pay more for fuel, electricity, water, rates, and road tolls.

But the most important reason why I wont fix is that the bank gets to employ a very clever bunch of analysts and actuaries, who calculate these risks for the bank. The purpose of offering fixed rates is not for your well-being but for the bank to make money out of you. So if the bank thinks they will be safe with a 3 % premium then I am NOT going to bet against them.

There is always a case for fixing your home loan rate, and we have not considered wildcard external forces like escalation of unrest in the Middle east and Nuclear catastrophe in Japan, both of which are possible.

If you want to be safe then remember that the option is available and it’s probably a good time to consider it now.

Is this something we should worry about?

Not in my view….but let’s look at the fundamentals. First let’s look at the 5 reasons economists tell us are the reasons why house prices are stagnant;

1. Economy – The South African Economy is still sluggish with GDP expected in the range of between 2.75%-3.75%. The firm rand has kept our exporters subdued and job losses continue and family income remains constrained.
2. Surplus of stock – there is no doubt that the boom of the last few years created more stock than the market could absorb, and developers are still struggling to offload their remaining stock.
3. Disposable income – the average consumer is still under pressure from high levels of debt, and lower income. While the interest rate decreases have put more cash in the hands of the average family, increased utilities, electricity, rates, water and tolls have eroded some of this.
4. Credit conditions – Banks stringent credit conditions have kept the market subdued and it has become very difficult for first time home owners to get into the market.
5. Consumer confidence – Demand drives prices upwards and there is no doubt that public perception has moved negative toward property.

So we know why the statics show prices dipping but first let’s look at the real facts.

ABSAs figures (see graph below) show that overall the price of the average home grew only by 2.9% AFTER inflation so far this year, which at worst case tells us that on average your property investment or home appreciated faster than the cost of living. As investors we try to identify property that will appreciate faster than average and again the average small house is still looking good. 

Typically a buy to let property, according to ABSA figures , would probably enjoy a growth over inflation of 13.8%. if you have rental income to add of say 5% 9 (Nett) on the value of the property you should still be earning a very tax efficient 18.8% on your gross investment – still good for me.

But here is my view of what is most likely to happen considering the 5 problem points above. Government has much in its arsenal to stimulate growth and with the Medium-Term Budget statement expected on 27 October and the next SARB MPC meeting on 16-17 November, we should see some adjustments to the sails. basically in a world of low interest rates our interest rates are still too high. One of the most obvious tools available to the reserve bank would be to drop interest rates further, taking pressure off the rand, and putting disposable income in the hands of consumers and business.

Consumer confidence should not be an influencing factor when considering real estate investment, but growing consumer confidence will push up demand for housing, and according to FNB /BER consumer confidence stood at +15 and confidence about own financial prospects fluctuated in +20 to +25 territory. So consumers are more confident than they have been since post 2004 when we experienced an unprecedented consumer boom. So if this is anything to go by, consumer confidence is moving strongly positive, but yet to boil over into consumption and real estate.

Affordability is still our biggest challenge but the average household debt is decreasing strongly and together with a more generous credit outlook that we are experiencing from the banks, this can only be a positive influence. A further interest rate decrease, which seems inevitable, will further improve both affordability and confidence.

Finally we see the volume of stock from developers drying up, even a few new schemes now finding their way onto the market. This is a real indication that prices will firm and new stock will not come at a discount for much longer. Again FNB building survey shows that although residential building plans submitted for approval are up, the completed buildings are only 50% of where they were at the peak in the third quarter of 2008.

Less stock coming on to the market and increasing demand.

A combination of even some of the solutions to the 5 points above will lead to price inflation in housing…

However, it cannot yet be said that the property market is in great shape. It is clear that this is still predominantly a buyers market with most sellers settling for prices under the asking price, compared to a couple of year ago when it was only about half of the sellers settling for less. Average time on the market is still over three months compared to less than a month before 2007.

Consumer price inflation is currently sitting at 6.2%. If you subtract this from the house price inflation figure of 5.8% quoted in the FNB House Price Index, the real house price inflation rate is still negative year-on-year, despite the recent market improvement.

Are the banks to blame for the property crisis? Well, it is true that banks are key players in the property market, and thus do influence it to a degree. But they are not the major influence as some would believe. This honour goes to the far bigger global economy, to government with its array of economic policies, and to the Reserve Bank interest rate policy.

Stringent lending criteria by home loan banks have been a hot topic for quite some time now. At a stage of the property downturn, estate agents surveyed by FNB were quoting this as a major reason for weak activity levels in the property market. Around that time, banks had started restricting loan-to-value policies for new loans granted, implying an increased number of loans for which significant deposits were required. However, the banking sector was not driving the weakening property trend through these actions, The evidence of a deteriorating situation was there before this tightening in credit criteria. Therefore, rather than driving the cycle they were merely responding to a deteriorating economic and property trend, caused by the greatest global financial and economic crisis since the Great Depression, rising local interest rates at the time, and surging consumer price inflation eating into disposable income.

You see, South Africa is a very open economy. The value of SA’s exports is about a third of its gross domestic product. The significance of this is that we are extremely reliant on the global economy, and extremely vulnerable to global economic shocks, which can severely dampen demand for our exports and this curtail our economic growth. We are also highly exposed to global inflation shocks due to our high dependence on exports, and the inflation surge up until mid-2008 was predominantly cause by such imported inflation, and the SARB responded by raising interest rates. Therefore, what happens internationally flows almost freely into our economy, affecting our job market and thus our housing market heavily. Even though our local banks have been a great deal more responsible than some of the banks in more developed countries, we couldn’t avoid experiencing the severe effects of the global recession.

From a home loan bank’s perspective, defaults usually occur in the first year to year and a half after the commencement of the loan, i.e. the near term is the highest risk period for the loan. In these early stages, loan-to-value ratios are still very high, compared to an older loan where, normally, the value of the property has increased and a portion of the capital has been repaid. In these crucial first stages of the loan, the banks are exposed to the highest risk, and in the event of early default they experience the biggest loss.

Oversupplies in the market put pressure on the price of stock currently for sale. We have already established that most properties are being sold at a discount to their perceived price in the boom years. Therefore, banks have to be very careful with regard to the loan-to-values that are currently being granted. In the event of a default, the loan-to-value decision could have a very significant impact on the level of near term losses.

Property owners have a much longer investment time horizon when buying property. The risks highlighted for the banks are the biggest at the time when the customer is at his most vulnerable in the early stages of the loan, and for our industry the emphasis is largely on the short term. Property investors, by contrast, normally take a long term view on property, and some capital depreciation in the short term would probably concern many of them far less than it would a bank.

These differing objectives result in a situation where a customer wants to buy with a long-term view, while a bank is looking at the risks faced today, and a misunderstanding of these contrasting focuses are perhaps a reason as to why the banks get blamed for their so-called “pro-cyclical” behaviour.

Our economy and thus our property and mortgage market is highly reliant on the economic well-being of the whole world. Banks have a big responsibility towards customers to ensure that they practice prudent lending policies (both morally and legally). Due to this sector’s inability to fight against these far more powerful global forces, it means that a weak and fragile global economic situation would essentially require a far more cautious lending approach than the better times of a few years ago. This is not necessarily what banks want, but we believe it is appropriate under the circumstances.