Economy will determine property market

The performance of the residential property market this year will be inextricably linked to the performance of the economy.

Given the state of household finances, consumer confidence and housing affordability, together with the likelihood of further interest rate hikes early this year, the prospects for the housing market do not look promising.

Jacques du Toit, a property analyst at Absa Home Loans, said house price growth had been on a steady downward trend since 2014 and was forecast to remain in single digits in 2016.

"Lower price growth is forecast for 2015 and 2016 compared with the previous two years, mainly as a result of trends in and the outlook for key macroeconomic and household sector related factors," he said. Du Toit added that in view of expectations for nominal house price growth and consumer price inflation, house prices were expected to remain virtually flat in real terms in 2016.

He added that factors related to the economy would continue to drive the residential property market, affecting the affordability of housing and the accessibility of and demand for mortgage finance.

John Loos, a household and property sector strategist, stressed that with the risk of recession looming ever larger, there appeared little to support average house price growth at currently positive real rates.

Loos said FNB's valuers already perceived residential demand to be slowing, but emphasised that a supply constrained market kept a reasonable market balance "for the time being".

But Loos said the renewed consumer confidence "nosedive" in December boded ill for the housing market this year.

Loos said the main components of the consumer confidence survey pointed to confidence being decimated more by what consumers were seeing, hearing or reading rather than their own actual financial situation.

However, Loos said that with leading indicators pointing to further weakening in the economy heading into 2016, the financial position of consumers should begin to weaken, which could drive an even further decline in consumer confidence.

Loos said this was likely to lead to a more cautious household sector, resulting in demand predominantly for primary residences and smaller homes to lower municipal services costs and reduce maintenance, insurance and other related costs.

He said there could also be some shifts on the supply side, adding that as the economic indicators deteriorated, the chance of a decline in new housing completions would increase this year.

There could also be some shifts in the supply side of the existing home market should the economy weaken further, with a greater portion of homeowners remaining in their existing homes to save on huge relocation and transactional costs.

"It almost goes without saying that selling in order to upgrade homes would likely decline in significance.

"But there are two sources of supply that could conceivably increase. Should the economy indeed get tougher in 2016, the one key group of sellers that could rise in prominence would be sellers selling in order to downscale due to financial pressure, and a significant portion of these would 'rent down' as opposed to 'buying down'.

"The second source of selling that could increase could be selling in order to emigrate. One gets the impression that the 2015 consumer confidence dip may be driven in part by concerns regarding the longer term economic future of South Africa, and that could enhance the skills drain once more.

"The magnitude of such a rise may be contained by the fact that the global economy is not booming, so employment prospects in many of the popular emigration destinations may remain limited," he said. Loos concluded that there was little that pointed to a better economic performance in 2016 and together with the expectation of further gradual interest rate hiking in the year, the residential market was expected to show some form of slowing.

He said the FNB house price index looked set to slow to an average of 6 percent in 2015 from 7.1 percent in 2014 and was expected to slow still further this year.

Source: Business Report