House price growth slowed down year-on-year (y/y) in nominal terms in January 2012, according to Absa Home Loans.
House price growth slowed down year-on-year (y/y) in nominal terms in January 2012, according to Absa Home Loans. On a monthly basis nominal price growth remained in negative territory, says the bank.
On a monthly basis nominal price growth remained in negative territory, says the bank.
The Absa House Price Index report reveals that the slowdown in the pace of house price growth can be attributed to a number of factors affecting consumers and eventually impact housing demand, growth in mortgage finance and house price trends.
These include:
- After interest rates were cut by 50 basis points in late 2008 and another 450 basis points in 2009, rates were lowered by a further 150 basis points in 2010.
Although rates remained unchanged in 2011, this did not provide any further stimulus to the housing market.
- Many consumers continued to experience financial strain up to late 2011 against the background of a low level of household savings, rising consumer price inflation and damaged credit records affecting the accessibility of credit.
- Employment remained under pressure in the first half of 2011 improving only slightly in Q3 2011.
- Consumer confidence was relatively low in 2011 compared to 2010, especially in the second half of 2011.
Writing in the report, Jacques du Toit, property analyst at Absa Home Loans says the average nominal price of small homes (80 to 141 square metres) in January was R664 400 and medium-sized homes (141 to 220 square metres) was R995 000.
The bank says in real terms house prices are set to deflate further this year, based on expected low nominal price growth and headline consumer price inflation to remain above the 6 percent level.
Standard Bank’s median house price recorded a 1.6 percent y/y growth in January from a revised 0.2 percent y/y in December.
Growth in real terms, utilising the bank’s forecast for CPI in January of 6.2 percent y/y, remains in negative territory, says Sibusiso Gumbi, Standard Bank Home Loans research analyst.
Standard Bank is of the view that the gloomy outlook for economic growth, both locally and domestically, will continue to materially weigh in on the decision to set interest rates.
As such, the banks foresee a flat repo rate, at 5.5 percent for the duration of 2012.
The impact of the recession on the value of residential developments and bank’s strict lending criteria have made it almost impossible for South African property owners to secure loans from the major banks where the security for the loan is residential investment property such as secondary flats or houses rented out to third parties.
According to Gary Palmer, chief executive officer of Paragon Lending solutions, banks changing their lending focus to unsecured, property owners looking for finance in order to initiate or expand projects are increasingly turning to second-tier lenders for assistance.
He explains that in the current environment, big banks tend to rely on sustainable income to service their loans.
If we are happy with the profile of tenants and the rental demand for units in the building there is a good chance we will finance a loan, using the residential investment property as collateral, says Palmer.
As a result, while they provide finance to commercial property owners with blue chip tenants and longer leases in place, there is currently almost no appetite for financing residential investment properties or blocks of flats where the residential income will be used to service the loan.
Palmer says because these leases are short term in nature and the banks do not vet the tenants, they do not get comfort from the strength of the tenant.
Changes to Lease Agreements as a result of the Consumer Protection Act and the Prevention of Illegal Eviction from and Unlawful Occupation of Land Act, which regulates the conditions and circumstances under which occupiers of property may be evicted, have further dissuaded banks from this market.
“The effect of all these changes is that the serviceability of the loan against rented residential property has become a concern for the banks,” says Palmer.
He says second-tier lenders take a different view with others such as asset-backed lenders viewing this segment as a growing and profitable area of the property market.
From what we have seen and from deals we have financed, demand in rental residential property is very strong in South Africa driven by the rising cost of living and the relatively low approval rates on home loan applications.
“This increase in the demand for rental properties brings buy-to-rent buyers back into property after a low point in 2011 when buy-to rent buyers comprised only 6 percent of all buyers.”
The rental demand is especially high in the R4 000 to R 6 000 per month bracket.
Palmer says it is important to pick tenants with good credit history and an encouraging employment history.
We will always assess these criteria before agreeing to a transaction.
“If we are happy with the profile of tenants and the rental demand for units in the building there is a good chance we will finance a loan, using the residential investment property as collateral.”
He adds that in this way, owners of buildings and property developers can secure funding for other projects that would not have been approved by a commercial bank. – Denise Mhlanga
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