Will prices fall by 2016?

A HOMEBID survey of leading property economists has found unanimity among them that interest rates will be raised gradually during the third quarter of 2015 by 25 basis points and by a cumulative 75 basis points in 2016 – the view of Absa Home Loans property analyst Jacques du Toit.

Unanimity was also reached on the likelihood that house prices would subsequently only rise in nominal terms between 1-5%p.a. at best and the greater likelihood that they would continue to move sideways as they have in the recent past, pointing towards a buyer’s market.

FNB household and property sector strategist, John Loos, is of the view that we are at the beginning of a real house price correction.

“We shouldn’t necessarily expect an all-out nominal house price decline. That would probably only come should we have a meaningful economic ‘shock’, for example, a significant recession. [What is] more likely, I believe is that we are at the start of the ‘real house price correction’ phase of the property super-cycle, where nominal house price inflation over a good number of years is generally below CPI and wage inflation, translating into a long term downward correction in real terms.”

Rode & Associates CEO, Erwin Rode, believes that monetary policy (that is, interest rates) is governed at present not so much by inflation expectations and the need to curb them but by US monetary policy, viz, when will the Americans start raising interest rates?

“This is generally expected to happen this year. SA as a country is living beyond its means, and we are utterly dependent on foreign inflows of money to fund our balance of payments deficit. These inflows are largely in the form of volatile portfolio investments, which can exit the JSE at the drop of a hat,” says Rode: Two examples of such a trigger event are (1) our interest rates not keeping up with US interest rates and; (2) the rating agencies derating SA’s government bonds to junk status in the wake of less-than-prudent fiscal policies.

“However, the US is expected to raise its interest rates only very gradually, and so it is reasonable to expect we will follow suit in a similar manner.

As for fiscal policy, the National Treasury is fully aware of this danger, so I do not expect the government will cave in to extravagant salary demands by the public sector. “Gradually rising interest rates will further retard growth in the economy, resulting in additional job losses and a further deceleration of real incomes. In addition, home affordability would be negatively affected through higher mortgage instalments.

“Under this scenario, house prices in middle-class suburbs would decelerate to zero. However, ‘affordable’ houses (those under R600 000), which are typically financed with 100 per cent bonds, may be harder hit. I do not expect a ‘sub-prime’ scenario in SA, but it is not inconceivable that prices in this category may actually decline slightly.”

Neville Berkowitz, property economist and adviser to HomeBid, is concerned that current speculation in the media over the 2016 Municipal Elections and seeing the ruling ANC possibly losing direct control of certain major municipalities could trigger political reactions which may affect confidence levels, and with it, home prices in 2016.

An ANC/DA coalition running major municipalities should boost investor confidence from foreign funders and local investors, however, an ANC/EFF coalition could trigger an outflow of foreign funds and a sharp rise in interest rates, affecting both confidence and affordability levels for homeowners.