High levels of debt keep SA property market down

Interest rates are at 30-year lows after falling 6 percentage points over the past two years but the housing market is showing signs of stalling.

The Reserve Bank's Monetary Policy Review, published last week, highlighted house price indices published by three domestic banks.

Though all returned to positive territory as the economy emerged from recession last year, growth in two of the three decelerated sharply between June and September.

Year-on-year growth in the FNB index dropped from 11.6 percent to 4.5 percent and in the Absa index from 10.4 percent to 2.9 percent.

The Standard Bank median house price index showed a different pattern, with year-on-year growth accelerating from 3.6 percent to 8.3 percent in the period.

In its latest report on the residential property market, Standard Bank economist Johan Botha said the acceleration was due to the very low base in September last year when the median house price contracted by more than 5 percent.

Absa property analyst Jacques du Toit said on Friday: "The recovery in the housing market globally and locally will take longer than in some previous cycles as a result of the extent of the impact of the recession."

He spoke of "widespread economic uncertainty especially in the industrialised countries" as a result of the "higher level of indebtedness of the global and local consumer".

In South Africa, household debt as a ratio of disposable household income, was 78.2 percent in the second quarter, according to the Reserve Bank, not far off its peak of 80.9 percent at the start of last year. The ratio remained high despite above-inflation increases in wages agreed during the year.

Du Toit said these increases had been neutralised by the large number of job losses since the start of the recession in the last quarter of 2008. According to Statistics SA there were 385 000 fewer people working in the formal sector in the second quarter than at the start of last year.

With mortgage rates now at 9.5 percent, from 15.5 percent two years ago, households' interest bills have fallen from 12.3 percent of disposable income to 8 percent over the period, according to Du Toit.

But he said the lower interest bill was not enough to neutralise the impact of the huge overhang of household debt.

Not only are consumers reluctant to borrow but banks' lending standards were tightened sharply during the credit crunch, which started at the end of 2008.

Du Toit said, although banks had started relaxing their lending criteria, they were still constrained by the National Credit Act implemented in the middle of 2007.

The new legislation introduced the concept of "reckless lending", which requires banks to take account of the ability of loan applicants to repay debt. Apart from the consumer's credit profile, Du Toit said, banks also looked at the broad economic outlook.

Business Report

Posted at 12:06PM Oct 18, 2010 by Editor in Market  |  Comments[1]