Is the residential property market safe?

The residential property market is usually considered a safe investment. However, the fall in house prices is a cause for concern all over the world.

In South Africa the situation is also a cause for concern, but now may be the time to make a safe investment in houses. An excerpt from the latest report from Standard Bank is now available.

Standard Bank: House price growth slipped into red in 2008

What is the latest?
With the data for the final month of 2008 in Standard Bank’s residential property book now available, the annual growth in the median price can be evaluated against previous years’ growth performances. Recall that growth in Standard Bank’s residential median property price peaked in 2004 when a rate of 24.2% (smoothed average) was recorded. Given developments in the economy such as the start in the upswing of the interest rate cycle, the rate of increase declined steadily to 6.6% in 2007. In 2008 the average median property price declined further to 0.3%, the first decline since 1996. In real terms, using the CPI to deflate the nominal data, the decline comes to nearly 12%. On a smoothed basis, growth in the monthly price declined steadily and has been in negative territory since June of 2008. By December the growth came to 3.1%. The residential property book for December 2008 shows that the smoothed value of the median residential property financed by the bank was R592 000. The data reflect a very fragile property market.

While the trend in house prices as depicted by the smoothed data is of general interest, the unsmoothed or raw data is of importance for technical reasons and a variety of other reasons also. For 2008, the raw data show that the median house price declined by 1.6%, down from the 8.3% increase calculated for 2007. The annual numbers mask some dramatic swings in the generally volatile monthly data. Two factors increased the volatility of the 2008 data. The base effects of the distortions created by the introduction of the National Credit Act (NCA) in 2007 were present in the middle of 2008, when strong declines in growth were reported. This is part from the ongoing impact of the NCA which effectively led to a tightening in lending criteria. A second factor occurred when the distribution of property prices changed. This happened later in 2008 when a decline in the number of middle- and lower=priced properties processed was reported. Put differently, the proportion of higher-priced properties making up the bank’s December loan portfolio increased, resulting in a higher median price for the month, as the raw data show.

What are the overall developments in the housing market?
Growth in Standard Bank’s residential median property price peaked in October 2004. The South African housing market has been in the doldrums since mid-2006 when the upward phase of the interest rate cycle commenced. The 500 basis points increase in the repo rate between mid-2006 and mid-2008 placed huge
stress on the economy in general and households in particular. The reduced affordability of housing, exacerbated by higher mortgage rates, high food and fuel prices, a sharply slowing economy, and the implementation of the NCA, led to a decline in the demand for residential property and a substantial softening in house price growth ensued. ... more

Click here the get the full report (PDF).