Will Property Stay In A Slump

Indicators point to weakening demand in fragile economy; office vacancy rate at 2004 highs.

JOHANNESBURG - Despite showing year-on-year gains, the news from FNB’s latest housing price index is not altogether positive.

When viewed within the context of a range of other indicators, the index becomes another voice in a growing choir chanting local and economic ailment.

Sustained growth in the property market is unlikely; real-term growth is not on the visible horizon.

FNB’s index on Monday reported a “further acceleration” in year-on-year growth in housing prices which is now at its highest level since August 2010.

The nominal year-on-year (as compared to the same month last year) growth rate for July was at 4.6% , growth for June sat at 3.1%.

However, when adjusted for consumer price inflation (CPI), the real growth rate remained in negative territory to the tune of -1.8% against a recorded CPI of 5% for June.

This implies that homeowners are continuing to effectively lose money on their property investments barring rental returns.

Says John Loos, FNB Home Loans Strategist, “the year-on-year growth uptick is still a reflection of what’s past in the summer. We had, in addition to seasonal demand… some increased demand on the two rate cuts late last year”.

“I think that’s all we’re seeing now coming through into the numbers with a bit of a lag”.

Says Loos, with the marginal effect that record low interest rates have had on the property market now beginning to “wear thin” and with a range of negative news painting a gloomy picture for the local and global economy, the outlook for property does not look good.

According to FNB’s report, “economic data releases and events lead to the belief that we could see increased pressure on the market in the near term.”

Says Loos, FNB’s estate agent survey, which acts as a leading indicator to the housing index, suggests that that uptick from the summer didn’t last and that “already in the second quarter there has been a weakening in demand”.

 He notes that FNB valuers also point to “some weakening in their demand rating”.

The same interpretation may be drawn from the South African Property Owners Association’s (SAPOA’s) Office Vacancy Survey which has revealed moderate increases in office space vacancies.

At just above 10% SA’s overall office vacancy rate is now at its highest level since 2004.

According to Marc Schneider, director of business strategy at Investment Property Databank, which conducted the survey, these increasing levels of vacancy come as office space supply is constrained.

With constrained supply, increasing levels of vacancy imply a weakening demand for office space.

“What you are finding is that the take-up generally has suffered a bit and as a result you are finding a moderate increase in vacancies,” said Schneider.

Says Schneider this weakened demand is, in turn, linked to reduced levels of business confidence.

Business confidence is strongly correlated with the current and expected performance of the local economy as a whole.

Ultimately, says Loos, this weakness in residential and office property demand is a consequence of an adverse global and local economic environment which is reflected in a host of leading macro-economic indicators.

Included here is the Reserve Bank’s leading economic indicator, which is closely correlated to statistics for new residential loans granted both of which are now showing negative growth year-on-year for a three month moving average.

Another major indicator is SA’s non-USA trading partners, this too, has by now slowed in terms of month-on-month and year-on-year percentage change.

Statistics for new residential loans provides a forward looking indication of movements in demand for residential buildings which in turn affects their price.

All-in-all, in case you hadn’t noticed the stubbornly high oil price and the worryingly high levels of debt in Europe and the US, it would seem that dark clouds may be starting to form on the horizon of the global and local economies.

Property, as always, is not likely to do well in such an environment