Real Estate Update - South African Property Market Corrections

South African Property Market Corrections - Not as painful as the USA property market

South Africa is experiencing a property market correction. The question is whether it is or has been on the same scale as has been experienced in the USA during the last 3 years. The American dream has in some states unfortunately changed into an American nightmare. Only a certain sector of the South African property market is experiencing a correction akin to the "American nightmare" of devaluation of property value up to 50% and has predominantly been visible on two fronts.

The first area is in they buy-to-let market section and more specifically in areas with an average to low rental demand. This generalised statement needs however to be qualified even further to pinpoint complexes with a below par managing agent and/or a Body Corporate who has allowed a bad rental mix to develop over the last 4 years. Complexes where the house rules do not "control" the quality and the average rental income for the units, have been experiencing sheriff auctions which culminated in a drop of value of between 45% to 60% below present CMA (comparitive market analysis) values.

The second area has developed around the affordability of credit/cost of servicing bonds, resulting in a high level of household debt to disposable income (due to high unemployment levels etc.)

This buyer's market environment in the abovementioned first "front", came about due to new property investors who did not do their homework properly during the "2004/2006 boom", creating a distressed sales market scenario with an oversupply of stock which will take some time to clear out. With e.g. South Africa's biggest bank and bond provider, ABSA, indicating that their bad deb to book is at present about 18%, a change in stock levels (due to an oversupply of certain property types) before 2014/15 is highly  unlikely - despite a growing black middle class and savvy property investors buying up rental stock which is delivering the sought after 1% per month returns. A nominal house price growth closer to the historical 10% per annum average could therefore only become visiable again when the oversupply has been dealt with, potentially initiating another so-called 23 year property cycle with a positive capital growth cycle in nominal as well as real terms.

In total, approximately 11% of all homes in the United States are currently standing empty. No comparitive residential market figures are available for South Africa - but given the huge demand experienced for rental homes, it is highly improbable that there is such a problem at all in the suburbs of the metropolitan areas. According to property economist Rode & Associates, apartment vacancy rate accross South Africa has dropped from a peak of around 6% in fourth quarter 2009 to the current 4%.

The following correction symptoms are present:

1. High percentage of distress sales

The large percentage of distress sales in the property market has increased in the first quarter of 2011 to 22% of total sales - up from 17% in the last quarter of 2010. A high percentage of sellers are therefore forced to downscale due to financial stress. In 2010 sales of previously existing homes in the United States were at their lowest level in 13 years, whilst 26% of all the homes sold in the United States were foreclosures or short sales. A similar percentage of property owners in both countries are therefore experiencing severe financial stress and are being forced to sell their properties below market values.

2. Availability of credit (bonds or mortgages) limited

Housing price deflation is being fuelled by banks that are constantly reassessing their exposure to the home loans market and being cautious in granting new bonds.

Banks in South Africa have only during the last few months been starting to relax and were previously as tight as was last experienced in the early 1980's.

According to OOBA, their March 2011 levels of bond approvals only equate to 36% of the levels achieved during the top end of the property boom in April/May 2007. It is however their highest levels since October 2008, showing that there is a gradual but positive movement in the SA property market. Only 44.7% of Ooba's bond applications are at present initially declined by the banks - which is an -8.1% improvement in the decline ratio. The effective approval rate has improved from 58.9% in March 2010 to 64.5% in March 2011.

The implementation of the NCA (National Credit Act) has redefined a borrower in South Africa. A large percentage of borrowers have been classified as a credit risk based on e.g. a few missed credit payments. Until the banks will operate on a more discerning basis, evaluating the long term reliability of the applicant as evidenced by his job record and possibly testimonials from his work superiors and bank manager, home ownership in the entry level property market will remain a problem. Deposit requirements remains a stumbling block for especially buyers who wants to buy into the affordable housing markets in townships. According to OOBA the average deposit as a percentage of purchase price fell 23.9% year-on-year to R134 519, equivalent to an average deposit of 15.6% of the purchase price of the average home in SA of R860 492.

3. High bond or mortgage stress levels

According to Rael Levitt (CEO of Auction Alliance), South African house price deflation is reflected in negative housing equity to most probably 1 in 15 (about 6.66%) of all South African homes. This is however in comparison to the USA still at a fairly low level. As of the end of 2010, 23% of all U.S. homeowners with a mortgage owed more on their homes than their homes were worth.

It is estimated that there are about 5 million homeowners in the United States whom are at least two months behind on their mortgages. In SA mortgage stress has sharply increased from 75 000 in the third quarter of 2008 to 130 000 in the last quarter of the year. Severe mortgage stress (4 months behind in bond payments) has catapulted from 8 000 in the second quarter of 2008 to over 35 000 in the last quarter of 2008. According to the USA Mortgage Bankers Association, at least 8 million Americans are at least one month behind on their mortgage payments.

4. Low sales volumes

Mike Schussler ( indicated that although 16.8% more transactions (9506) registered in South Africa in the Deeds Office during January 2011 than in January 2010, it is still 40% below the average transaction volumes of the SA property market during the last decade - i.e. about 16 000 transactions per month (or 192 000 p.a.).

In January 2009, 9190 transactions had been registered in the Deeds Office - showing an increase of 3.5% in registered transactions between January 2009 and January 2011. If the above 22% of distressed sales can be applied to monthly registrations during the first quarter of 2011, it means that about 2100 property transactions per month are at present transacted nationally under distressed conditions. This is up from 1200 per month as has been estimated by Auction Alliance during the beginning of 2009.

Another dampening influence on sale volumes in South Africa has been the relative low levels of buy-to-rent investors - who at the moment comprise only some 7% of the total property buying market, down from about 22% during the property boom period.

Sales of previously occupied homes in the USA were about 5.36 million in 2010, which is still far below the estimated 6 million homes a year (or 500 000 per month) needed to maintain a healthy property market. New home sales in the United States in January were 11.2% lower than they were in December. The new home sales number for January 2011 was 18.6% lower than the number for January 2010. New home sales in the United States are now down 80% from the peak in July 2005.

5. Below historical levels price growth

Besides "debt", the rest of the 5-D property market stimuli (death/divorce/downscale/depart) have been strong enough to keep the price growth in South Africa relatively intact - varying between -10% to just over 0% during the last 3 years - quite contrary to the America experience. This relatively stable market conditions has re-instilled relative confidence in the South African property market. According to the FNB Estate Agent Survey, there is already evidence of an improved supply of stock coming to the market from sellers "selling for non-negative reasons". Seller's confidence in their ability to get their price has during the last few months improved with an increased number of aspirant sellers who are putting their property on the market due to the other 4 (non-debt related) of the 5-D property market stimuli.

Nominal price growth of between 1% and 1.5% is currently forecasted by ABSA for the South African property market in 2011. Based on this forecast and a projected average consumer price inflation rate of 5% this year, house prices are set to decline by more than 3% in real terms this year in South Africa. The March oobarometer price index reveals that the average house price rose 1.1% year-on-year to R860 492 from R850 864 in 2010.

According to CoreLogic, home prices in the United States declined by 5.7 percent between January 2010 and January 2011. Excluding distressed sales, year-over-year prices declined by 0.1% in February 2011 compared to January 2010. National home prices, including distressed sales, declined by 6.7 percent in February 2011 compared to February 2010.

When you remove distressed properties from the equation, CoreLogic is seeing a significantly reduced pace of depreciation and greater stability in many markets in the USA. Price declines are increasingly isolated to the distressed segment of the market as the stock of foreclosures is slowly cleared.

6. Uncertainty about market values of SA property

Despite a 421% increase in price between 1997 and 2011, even the Economist (of 3 March 2011) did not or could not determine in their global house price index whether South African property are in fact overvalued - relative to 20 other countries. In theory, the price of a home should reflect the value of the services it provides. People who choose to rent their homes buy those services on a monthly basis. Home prices should therefore reflect the rents that tenants pay.

Only in Hong Kong, Singapore and Switzerland is the property market according to the Economist more overvalued than it was before the global economic downturn began in the third quarter of 2007. In every other market the ratio of prices to rents has fallen over that period. In America, prices may have overshot a little. Using the Case-Shiller index of prices, the USA property market looks to be undervalued by almost 8%.

An open question since the 2007 turning point - i,e the top end of the price growth cycle, is whether the capital growth gains in house market values created a property market bubble and stands to be corrected by a dramatic price decrease. This question has also played a role in undermining buyer confidence, as some buyers view the extraordinary growth of 421% achieved in the SA property market in the last 14 years at an average of 30% per year, as a market which stands to be corrected not only in nominal price terms but also by about 50% in real price terms.

In the 1980's however high levels of inflation created a scenario where nominal prices of houses kept growing due to a devaluation of the Rand - preventing a bust scenario as the price growth pattern remained on a plateau for about 6 years to 1997, before nominal prices of the average house experience another rapid growth phase between R194 435 (1997) to R930 332 (2007) - that is a growth of 378% in 10 years or 37.8% p.a. In comparison average nominal house prices grew from R29 281 in 1979 to about R132 032 in 1991 - that is a growth of 351% in 12 years or 29% p.a.

The South Africa property market has during the last 50 years reacted differently from the boom-bust scenarios experienced elsewhere in the world. The 2010's property plateau will most probably be longer than the 6 year span experienced during the 1990's and its run will be determined by the inflation rate and logically its effect on our currency. The biggest difference however between the plateaus of the 1990's and the 2010's is the remedial effect the growing black middle class will have on the property market.

To expect a 50% doom and gloom "correction" in the SA property market simply because the forces of the property market in the USA or even Australia necessitate it there locally, is to ignore the huge historical difference between the countries. The South Africa property market has potentially amongst the highest percentage of first time buyers (or upgrading buyers) in the world amongst the emerging black middle class - most of them eager to commit the moment credit will become more readily available.

Source: Real Estate Web

Courtesy: The EAAB - Estate Agency Affairs Board

“Redressing the Past, Building the Future and Guiding the Real Estate Business towards Professionalism”

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