The South African residential property market is expected to experience a relatively mild cyclical downturn rather than a full blown recession, says Sizwe Nxedlana, Standard Bank Property Economist.
"Given the current dismal house price growth currently being experienced in South Africa, the question of whether or not the South African housing market will experience a deep recession similar to that being experienced in the US housing market is being asked with increasing frequency.
"However, our analysis of the sources of the recession in the US housing market and it subsequent transmission mechanism to the rest of the US economy suggest that South African residential property will experience a relatively mild cyclical downturn rather than a full blown recession," says Nxedlana in the latest Standard Bank Property Gauge.
The Standard Bank median house price index recorded negative year-on-year growth for the second consecutive month. The Standard Bank median house price fell to 530,000 rand in April from 550,000 rand in March.
The April median house price of 530,000 rand translates into a growth rate of -8.6% year-on-year when compared to the median price recorded in April 2007.
The five month moving average growth rate declined to -2.8% year-on-year in April. However, these figures should be interpreted with caution before any assumptions are made, according to Nxedlana.
He says: "A relatively high base value from which the latest and pending year-on-year growth rates is calculated was established last year.
"The establishment of the high base was primarily due to the temporary upward adjustment in the distribution of mortgages entering Standard Bank’s home loans book in the months leading up to the introduction of the National Credit Act (NCA).
"The uncertainty preceding the implementation of the NCA incentivised the prioritisation and increased the urgency by market participants to conclude higher valued housing transactions in order to circumvent the possibility of stricter lending standards post implementation."
The distortive base effects may continue to impact the point estimates of the monthly median house price in May, June and possibly July suggesting further negative year-on-year growth rates in those months.
"The implication of all of this is that there may be an overestimation in the extent of the decline in house price growth.
Leon Barnard, Director Standard Bank Personal and Business Banking Products says: "Property remains the one of the best investments and over time has shown very good returns. There is no denying that South African consumers are starting to feel the pinch of higher inflation and the higher interest rate environment.
"There is also no denying that property prices have cooled off dramatically in the past few months as a consequence of these environmental pressures. While these numbers might raise some concern there are a few important factors to bear in mind.
"Firstly, it is the upper most sector of the property market that has cooled off the most. We are starting to see increased levels of activity in the lower property segments.
"It’s not all doom and gloom. Standard Bank is actually quite pleased with the performance and resilience currently being seen in the lower spectrums of the property market."
The recent trends in South African house price growth, when compared to trends in the US and the growing impact of the sub-prime crisis could at first glance seem ominous for the outlook for South African residential property.
Increasingly, there are comparisons being made between the sub-prime induced housing recession in the USA and the current challenging conditions facing the South African housing market.
"The overall downward trend is still reflective of the sharp fall in demand due to the reduction in housing affordability which is a function of other well documented factors constraining the ability of consumer to purchase residential property," says Nxedlana.
- From The Business Times - 5 May 2008
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