JOHANNESBURG - Housing prices have been coming down in real terms for much of 2011 and this negative growth trend is something that property analysts expect to continue for at least the rest of the year, probably longer.
With investment in residential property more likely to lose the average homeowner money in the near term, Moneyweb asks whether those consumers who have a choice should be opting to rent or to buy.
SA’s housing price boom, which saw year-on-year price increases of around 30%, began tapering off as far back as 2004, according to Absa’s senior property analyst, Jacques du Toit.
But it will come as no surprise that housing prices saw their strongest declines following the financial crises of 2008/2009 with nominal housing price growth dipping sharply into the red for much of 2009.
They have never really recovered.
According to FNB, since February 2008, residential properties have shown a real-term (ie, when adjusted against inflation) cumulative price decline of just under 15%.
The nominal (ie, in simple rand terms) increase has been placed at a dismal 6.4% over that period.
Recent performance, too, has been bleak.
After picking up (off a very low base) in the first half 2010, housing price indices from FNB, Absa and Standard Bank have all been saying pretty much the same thing for 2011: prices have been increasing nominally but at a snail’s pace.
Nominal growth for 2011 has hovered at around 1-2% for most residential markets. Prices have seen a recent upswing, growing at around 5% in July, but those who view that as the start of a sustained upward trend are badly mistaken, according to the analysts spoken to.
Going forward, it is essentially that same theme which hammered property markets in 2009: an increasingly bleak-looking global economy.
While a host of local ailments such as a diminishing local GDP outlook, consumer over-indebtedness, below-inflation salary increases, rising cost of living, slumping consumer confidence and tightening bank lending criteria provide the bread for this rotting sandwich, it is a dire global outlook that provides the nutrition-less margarine.
With talks of a second recession now beginning to circulate, analysts see marginal (1-3%) nominal housing price growth in the near term (up to five years) at best, with real-term growth expected to continue to decline.
FNB’s July index states that “July’s economic data releases and events lead to the belief that we could see increased pressure on the market in the near term”.
According to Absa’s July 2011 index, homeowners are likely to experience a further 2.5 – 3.5% real-term price decline on their properties by the end of the year.
John Loos, FNB’s home loans strategist, says: “The next time we’ll get nice real house-price growth will be at the next interest rate cutting cycle, which is probably a few years away.”
But we all need a place to sleep, so would renting be the way to go?
“The most important consequence (of current and forecasted real-term house price deflation), according to property economist Erwin Rode, “is that ,especially for new entrants, there’s no urgent reason to buy, it’s not like the markets are going to run away from you ... Renting is the savvy option at the moment”.
Loos essentially agrees, but with a caveat.
“The impression is that rental yields (payments) are still on the low side … very often you can rent a property for cheaper than a 100% instalment payment on a new 100% bond”.
However, he warns this current cost-saving opportunity through renting is not necessarily going to continue as rental prices will tend to increase while longer-term interest rates (which affect the repayment amounts on mortgages) tend to fluctuate.
“It’s a tough one to say but what I would say is that if you’re under financial pressure the rental option can be very attractive.
“If you do rent ,and you save money, you consume it …[so] often borrowing big amounts of money for a house with a contractual obligation to pay it back does enforce financial discipline on a household,” he said.
So if you are going to rent in the near term ensure that you are financially prudent.
Du Toit is not entirely for the rental option but suggests that consumers may not have much choice.
“In some instances it can be even more expensive to rent a property than to buy that same property,” he said.
With current levels of poor savings and over-indebtedness, most consumers will simply not be able to come up with the deposits required to secure mortgage loans.
“The deposit issue is a major thing at this stage,” but “if you have that deposit, mortgage repayments are currently 33-34% lower than at the end of 2008 … and that is the difference,” Du Toit concluded.
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