Residential property market highs and lows

House prices in the residential market have been surprisingly on the upside, but the rental flats market is in deep trouble, according to the Rode Report for the third quarter of 2020 from Rode & Associates.

Nominal house price growth reached 2.8% in August 2020 compared to August 2019, up from the 1% growth seen earlier in the year.

“However, prices still declined in real terms after having taken out inflation. We ascribe the recent increases to pent‐up demand (as the initial hard lockdown restricted sales), limited available supply on the market and record low interest rates,” says Kobus Lamprecht, editor of the Rode Report.

“We have our doubts about the sustainability of rising house prices over the medium term, as the house market is tightly tied to the fortunes of the economy.”

Rental lows

Low interest rates that made it possible for tenants to become owners, as well as the dire state of consumers’ finances, contributed to a spike in flat vacancy rates, reaching 11% in the third quarter, up from 7% in the second quarter of 2020. The oversupply of flats is also linked to huge increases in new rental stock in 2018 and 2019.

“We believe flat vacancy rates will rise further in the short term as more tenants run into financial trouble. And then there is the very real possibility of a second Covid‐19 wave,” says Lamprecht.

Owning highs

The dramatic 300 basis points drop in interest rates has made owning a house more affordable for market entrants, but Lamprecht points out that the risk facing these investors is of course the future path of interest rates in the light of the fiscal cliff the country is facing.

“First‐time buyers are very sensitive to interest rates. According to Betterbond, 70% of its applications in the first eight months of 2020 were from first‐time buyers, while 62% of bonds granted in July covered the full purchase price (100% bonds). Houses priced below R1 million are attractive to buy considering that no transfer duty is involved,” Lamprecht says.

Betterbond also noted that there was a 4.6% year‐on‐year increase in applications for homes between R1 million and R1.5 million in August, as well as a 6% increase in applications in the R2 to R2.5 million price band. Lamprecht says this implies that the impact of lower interest rates is filtering through to the more expensive properties which struggled over the past few years.

Lamprecht does not think rising house prices will be sustainable due to a very weak, junk‐rated economy, the fiscal cliff, the high and rising ratio of household debt to disposable income, rising unemployment and rising utility costs.

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