Residential property is looking up - experts

The consensus in the property industry seems to be that the slump in the residential property market is coming to an end, with early signs of a recovery.

John Loos, a property strategist at First National Bank (FNB), says that although the FNB House Price index continued to show a year-on-year decline in August, the rate of deflation has diminished, with the index showing clearer signs that the market is starting to stabilise.

However, Loos cautions that it is important to realise that the economic growth indicators remain very weak despite some improvement. "Given the high levels of indebtedness in South Africa, the expectation is that the economic and property recovery over the next year or so will be moderate at best," he says.

On a year-on-year basis, the house price index declined by 7.4 percent in August, a significant improvement on the revised deflation rate of 8.5 percent in July.

Improved affordability due to interest rate cuts is one of the factors pointing to an improvement in the market. Interest rates have been cut six times since June last year, with the prime interest rate being reduced from 15.5 percent to its current level of 10.5 percent.

According to the FNB House Price index, the rate cuts have led to the beginning of a decline in the level of arrears for FNB clients. There has also been a sharp decline in insolvency rates - second-quarter insolvencies were down by about 40 percent year-on-year. However, Loos cautions that the recovery in households' ability to service debt is a "high risk" recovery, because it depends almost solely on interest rate cuts, and the overall level of indebtedness remains high.

Loos says that while the property market looks set to move back into price inflation early next year, the expectation is that 2010 will see single-digit inflation and probably little if any "real" house price inflation (house price inflation that outstrips consumer price inflation).

Jacques du Toit, Absa's sectoral analyst for secured lending, says house prices are expected to decline further in nominal terms towards the end of this year and probably also into early next year, but the pace of deflation is expected to slow down in the second half of this year.

"For 2009, nominal house prices are expected to decline by between three and 3.5 percent after prices increased by 3.7 percent last year.

"In real terms (after inflation), prices are projected to decline by about 10 percent this year. Real house prices are set to decline for most of next year before turning positive, with nominal house price growth expected to be relatively low in 2010 and consumer price inflation expected to average around six percent next year," he says.

Standard Bank and Absa relax their lending criteria
A relaxed lending environment is one of the biggest drivers of a recovery in the residential property market, says Saul Geffen, the chief executive of mortgage originator ooba.

In the past year, banks tightened their lending criteria and you were not able to get a home loan without first putting down a deposit of between five and 20 percent, depending on the price of the home you were buying. However, there has been a slight shift by banks. In the past two weeks, Standard Bank and Absa have announced that they will be offering bigger loans to prospective homeowners.

"We have seen increased competitiveness between the banks in the past four months and a marked increase in (home loan) approval rates across the board," Geffen says.

He says banks are targeting people who bank with other institutions.

"The move by banks to relax deposit requirements is a positive development for the property market," he says.