Housing market shaken down to foundations

Johannesburg - House prices are still falling, according to Standard Bank's most recent residential property gauge released on Monday.

The bank's median house price index decreased by two percent year-on-year in February, following a decline of 3.6 percent in January.

"Evidently, households find economic and financial conditions extremely challenging, while the tightening of lending criteria by financial institutions makes it more difficult to access finance," said Standard Bank's Johan Botha in a statement.

"In real terms, using our estimate of the CPI in February to deflate the nominal data, the decline comes to approximately 10 percent," Botha said.

The residential property book for February 2009 showed the value of the median residential properties financed by Standard Bank was R558 000.

"Furthermore, prospects for the housing environment in 2009 are likely to remain poor," Botha said.

An immediate, meaningful improvement in the housing market was highly improbable.

The bank's residential property book "unambiguously" reflected property market under "tremendous strain".

Growth in Standard Bank's residential median property price peaked in October 2004. An important trigger point in the house price cycle occurred in mid 2006 when the upward phase of the interest rate cycle commenced, Botha said.

The 500 basis points increase in the repo rate between mid 2006 and mid 2008 placed huge strain on the economy in general and mortgage holders in particular.

The number of mortgage loan applications declined significantly from November 2008 onwards as households were unable to access finance due to new lending criteria, he said.

Botha said the macroeconomic backdrop remained bleak.

"The global financial crisis gathered momentum in the latter part of 2008, impacting not only on credit and financial markets, but also on the real economy.

"The current weakness of the economy should not be underestimated," Botha added.

The last half of 2008 showed large swathes of the economy under huge pressure: economic growth virtually came to a standstill in the third quarter of the year and was in fact negative in the final quarter of the year.

Consumers who had overextended themselves during the low interest rate environment now found themselves under severe financial stress.

The outlook for the first half of 2009 remained worrisome, notwithstanding interest rate cuts in December and February, he said.

The international economic environment remained exceedingly frail while locally, consumer confidence was at an extremely low level.

Other indicators of the financial stress of households were the deterioration in the performances of the retail and vehicle markets.

"Some let off, however, is provided by lower inflation and a declining interest rate cycle. Consumer inflation is expected to ease to the upper limit of the inflation target by midyear and end the year at around 5.4 percent.

"Falling inflation and a frail economy will allow the Reserve Bank scope to cut the repo rate further -- another 250 basis points cut is foreseen for the rest of the year."

The full impact of interest rate cuts on economic growth could take as long as 18 months.

"An immediate, significant turnaround in household sentiment, which is vital for sustained growth, is unlikely at this stage," he said. - Sapa