Probably the easiest way to describe the current SA residential property market would be to say that it reflects the economic times that we find ourselves in.
The domestic economy ticks along, rarely far from 0% growth these days, averaging 0.3% GDP growth in 2016, while 2017 is looking to be a little different. There were some mildly encouraging signs in early 2017 — with drought conditions being alleviated — a positive for the agriculture sector, and metals commodity prices mildly improving, a positive for mining.
These factors could have taken SA’s economic performance to slightly higher levels, but then came the credit rating downgrades by certain rating agencies to junk status, an event that may have been largely responsible for the second quarter RMB-BER business confidence index reading of 29, the lowest level in about eight years.
Sentiment plays a key role in the residential market as well as the broader economy, and local sentiment just isn’t good at present.
And that’s the environment in which the residential market finds itself, an environment with little growth support, either from the economy or from sideways-moving interest rates.
But the upside is that neither the economy nor the housing market has "fallen through the floor". The recent two-quarter technical recession hasn’t been severe. The household sector has become increasingly financially constrained. While mortgage lenders may well be battling to find any transaction volume growth in the current market, they also have relatively low levels of mortgage arrears and remain very profitable.
Perhaps the best statistics to reflect a "financially constrained but not stressed" environment, emanate from two questions raised in the FNB Estate Agent Survey. The first question relates to constraints, asking agents to estimate the percentage of home sellers believed to be selling in order to upgrade to a better property. This estimated percentage has dropped markedly, from a high of 20% at the end of 2013 to 13% in the most recent survey for the second quarter of 2017.
The second question relates more to financial stress, where we ask agents to estimate the percentage of sellers believed to be selling in order to downscale due to financial pressure. This estimate has risen, but only slightly, from an 11% low in the third quarter of 2015 to 13% as at the second quarter of 2017. This is a small increase, and remains low compared with the record 34% high recorded in the second quarter of 2017.
The "financially constrained but not stressed" environment is also reflected in the slow growth rate of the FNB house price index, which has remained in low but positive nominal year-on-year growth territory to the tune of 2.8% for the first half of 2017.
If a market needs a downward correction, as we believe the housing market currently does, first prize is for low but positive nominal house price growth, as opposed to an all out decline, but still remaining below inflation as measured by Consumer Price Inflation (CPI). This translates into a gradual house price correction in real terms.
In recent times, such a gradual real decline has been the order of the day.
The reason we believe a house price correction is required is that by historic standards (over the past few decades) real house price levels remain very high. Such high levels are more reflective of the 5%-plus economic growth rate that we saw in the few years prior to 2008 than they are of a near-zero percent growth economy that we have today.
What does a slow, downward house price correction mean for buy-to-let investors in particular? We believe it will lead to a gradual rise in residential yields over the next few years. The emphasis would be on gradual, though, because rental inflation is not overly strong currently at slightly below 5% (according to Stats SA CPI rental data). As at the third quarter of last year, the FNB-TPN Gross National Yield on residential property was estimated at 9.1%. Using a Rode & Associates rule of thumb of subtracting 1.5 percentage points to get to a net yield, that would have put the net yield at 7.6% by late last year. This would perhaps still be a little low to be attractive to would-be investors, given an average mortgage borrowing rate of between 10.5% and 11%.
The rental market, like the home owners market, has also been one of low growth but low stress.
While rental inflation hasn’t shot the lights out, TPN tenant payment performance data has shown only mild deterioration, from 86% of tenants being in "good standing" with their landlords regarding rental payments at the end of 2014, to 82.8% by the first quarter of 2017. To provide some perspective, this remains a good percentage compared with a brief low of 71% back in the 2008/2009 recession.
Buy-to-let home buying ambles along at just shy of 10% of total home buying, which is mild compared to the crazy pre-2008 boom years where it reached 25% in 2004. One should probably not expect much more from this source of home buying in the near term, given that capital growth is slow and yields are perhaps not yet overly attractive. But the current economic and property environment may be what is required for a rise in the latter.
Given ongoing personal tax, municipal rates and utilities tariff increases, smaller is likely to be better in home investment decisions in future, thus we expect to see the longer-term move towards smaller average stand sizes, more sectional title living, and less homes with luxuries such as swimming pools. Increasingly, for much of the middle class, it will become more about the basics.
• Loos: property strategist, FNB
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