OVERVIEW: 3RD QUARTER BAROMETER ACTIVITY LEVELS DECLINE, BUT ESTATE AGENT CONFIDENCE IMPROVES.
INFLATION AND INTEREST RATE RISKS RECEDE, BUT ECONOMIC GROWTH RISKS ARE HIGH.
SOME ENCOURAGING SIGNS EXIST, BUT RESIDENTIAL PROPERTY HAS SOME WAY TO GO BEFORE THE TURN.
The FNB Property Barometer for the third quarter showed further weakening in demand activity levels as experienced by estate agents.
From a level of 4.4 (on a scale of 1 to 10) in the second quarter, survey respondents reported a further decline to an average activity level of 4.1, the lowest in the history of the Barometer. A further indication of the weakening trend is to be found in the average length of time that a home stays on the market before getting sold. From an average time of 14 weeks and 6 days in the second quarter, the average time frame shot to 20 weeks and 1 day in the most recent quarter. First time buyers made up a mere 12% of the market, the lowest percentage on record, while the percentage of sellers not obtaining their asking price rose further from 85% previous to 88%. The buy-tolet
market portion of the market, too, remains subdued with only 13% of total buyers believed to be buy-to-let buyers.
However, while reporting lower actual activity levels, the Barometer survey also picked up a significant improvement in confidence looking forward, amongst estate agents surveyed. 48% of agents surveyed in the 3rd quarter expected improved activity levels in the final quarter of the year. Although there is a seasonal factor in the numbers, this percentage is very sharply up from 19% of the previous quarter as well as being higher than the 42% of the same quarter a year ago, suggesting something more than just seasonality. It is evident that the news had become so bad in recent times, that the decision of the SARB to merely leave interest rates unchanged in August seemed to have a significantly positive impact on agent confidence. In addition, they report a decline in the importance, as a driver of expectations, of the general wave of negative sentiment that seemed to sweep the country earlier in the year.
There appears to be some substance to the estate agents' improvement in confidence. Looking at economic numbers, there have indeed been a few encouraging signs emerging that relate to the future well-being of the residential market. Most notably, a recent decline in oil prices, resulting in domestic petrol price cuts, and some softening in global food price inflation bode well for domestic consumer price inflation, and Firstrand Group believes that the CPIX inflation rate may be around its peak. The start of an expected decline in inflation would mean inflation eating less into disposable income going forward, while also expected to translate into interest rate cutting as from April 2009. In addition, the household sector's debt-to-disposable income ratio has begun to decline, suggesting an improving household sector ability to service its debt burden in the near future.
But while debt-servicing, inflation and interest rate risks look set to subside, which is great news for a property market under pressure, one must caution against too much excitement just yet. Moving in to replace the above risks is the current threat to global economic growth emanating from the United States.
It would be naïve to think that South Africa's property and financial sector's are not significantly exposed to potential fallout from the United States financial and housing sector crisis via the potential impact of the crisis on our economy. While the US financial sector's bailout plan is a fait accompli, it remains to be seen as to how strictly the recovery plan is regulated, and how tight lending policies to households in that country become in an effort to restore responsible lending practices. The combination of tight household/consumer lending and falling house prices can have a major impact on already-low US consumer confidence and thus on economic growth in the world's largest
economy. If things get bad enough, and we probably don't really know how bad that country's financial crisis is yet, South Africa would not be immune from recessionary conditions and financial stress emanating from the US and Europe. The impact would not necessarily be a direct one via SA financial institutions exposure to toxic US assets. That exposure is reportedly limited. Rather, the exposure to the risks that the US financial crisis poses is via that negative impact that it may have on the US economy, which would in turn slow the whole world economy along with SA, due weak US demand for global exports. SA exports would not escape unscathed, slowing the export-oriented
sectors of the economy, notably manufacturing and mining, which in turn would negatively impact on jobs and therefore household sector income growth. That, in turn, is bad for residential property demand.
Firstrand's most likely scenario is not one of global and domestic recession, but rather slower domestic economic growth but remaining positive, supported by lower commodity prices, notably oil. Under such a growth scenario, accompanied by declining inflation and expected interest rate cuts from April 2009, a recovery in residential property demand from next year is anticipated.
However, one ignores the current global growth risks at one's peril. Does the bailout plan for US financial institutions mark the beginning of the end for that country's financial sector crisis, or are we only seeing the beginning of the troubles, which have also branched out to Europe on a smaller scale? Only time will tell. If the crisis gets significantly worse than expected, taking global economic growth far slower with it, the residential property market will not escape unscathed.
Therefore, although we believe that recession, and the consequences thereof for residential property, can be avoided during the current downturn, caution with regard to spending, borrowing and lending practices should be the motto until such time as we have more reliable indications as to whether the US crisis is near its end or not, because as much as we see declining risks from a household debt, inflation and interest rate point of view, global and local economic growth risks have moved in to replace them.