Junk-era may drag down housing recovery

The timing of the double-downgrades by S&P Global Ratings and Fitch is unfortunate for the long-struggling housing market.

Over the last five years, homeowners have been struggling to make money from their residential properties as house prices have barely kept up with inflation.

However, house prices had begun to show promising signs of renewed strength before President Jacob Zuma’s wide cabinet reshuffle, which resulted in S&P’s decision to cut SA’s foreign currency credit rating to junk and Fitch cutting both foreign and local currency credit rating to junk. The growth previously experienced by the sector now stands to be eroded.

Latest data from FNB indicated that nominal house prices (not inflation adjusted) in March showed an improvement after stagnating in the preceding months. House prices grew by 4.1% year-on-year compared with a paltry 2.7% in February.

In real terms (inflation adjusted) house prices are still in the red, with property prices falling by 2% in March compared with 3.4% in February.

FNB’s property strategist John Loos said the magnitude of the house price decline in real terms has begun to represent a noticeable house price correction. “This [the recovery] is not too surprising given signs of a moderate economic recovery in SA… Global commodity prices are stronger and domestically the drought conditions have alleviated,” he said.

The improvement of the economy is also having a positive spinoff for the duration of residential properties on the market. FNB’s data shows that the estimated average time of homes on the market declined in the first quarter of 2017 to 13 weeks and four days compared with the previous quarter’s 15 weeks. Loos said a marginal increase in demand coupled with constrained supply of properties may have boosted the shorter time of homes being on sale. It’s too early to draw conclusions as more quarters are needed to assess the strength of the market, he cautioned.

Outlook

The big question is what will the housing market look like in a junk-era.

Absa Home Loans property analyst Jacques du Toit said the full impact of the downgrades is not yet known. Consumer confidence levels will likely be negatively impacted resulting in prospective homeowners postponing new property transactions, he said. “Existing homeowners will react in such a way that they will renovate their properties rather than upgrade to an expensive property. The property market will be affected in terms of lower transaction volumes, demand and growth in mortgage finance.”

Further junk downgrades to the local currency credit rating by S&P and Moody’s (yet to publish its rating) will have wider consequences.

There could be pressure exerted on capital outflows out of SA, resulting in a weak rand and imported inflation, said Du Toit.  This cocktail would lead to an unexpected resumption of interest rates, restraining residential demand and house price growth. SA knows this scenario well, as the prime lending rate rose to an all-time high of 25.5% in 1998, spurred on by massive currency and inflation volatility due to political ructions.

Already a number of property economists have downgraded their 2017 house price forecasts. Du Toit expects the residential market as a whole to clock up nominal house price growth of 3.5% this year (with a downward risk), markedly lower than 2016’s 5% and 6% in 2015.

Seeff Properties chairman Samuel Seeff said a price segment that could be hit the hardest by the downgrades is the R1.2 million to R3 million range, largely made up of first-time homebuyers. “Buyers in this market usually don’t have an option of leaving SA, unlike more wealthy buyers in the upper segment, who have more choices. We expect that first-time home buying activity will continue,” said Seeff.

The good news is that banks are still granting home loans to potential buyers, said Ronald Ennik of Gauteng-based Ennik Estates. “This confirms they are seeing value in the residential property transactions that are happening right now. In fact, there has even been a slight easing of loan-to-value ratios [deposit required for a mortgage] recently,” said Ennik.

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