Housing in Southern Africa May 2015

Housing

Time for correction While the residential property market remains solid, growth in this market appears to be gradually running out of steam, and the time for a more significant ‘downward correction’ in real house prices is due, says John Loos, FNB Property Economist.

B ut, Loos cautions, this should not be interpreted as some kind of crash in home values. “Many housingmarket corrections take place slowly in real terms,” Loos says, “often over a number of years one gets slow house price inflation, which remains below the general rate of inflation in the economy, Con- sumer Price Inflation (CPI), or wage inflation.” This means that, while house values may be rising, in real terms when adjusted for CPI inflation they are declining gradually, thereby in effect bringing about a gradual move to lower real home values.” Loos notes that the previous big downward correction of the 1980s/90s took place over almost 15 years, from1984 to 1998. This created a very low real house price base and we sawone of the biggest house price growth booms from 1999 to 2007. To understand why Loos believes that a significant downward real home price correction is due, one needs to appreciate the extreme na- ture of that 1999 to 2007 house price boom and the driving factors. The boom had its foundations in two structural economic changes, we had a political settlement leading to democratic rule in South Africa, and this brought about the end of the country’s economic isolation through disinvestment, boycotts and sanctions. This meant that we could nor- malise trade and business ties with the world, export and investment performance improved as well as

economic growth, employ- ment and household in- come growth. Then, in the late 1990s, the South Afri- can Reserve Bank (SARB) moved to an official infla- tion targeting regime, and its strategy of trying to pro- tect the value of a volatile Rand, with often extreme interest rate levels. With CPI inflationhaving beenon the decline from the late 1980s onward, this policy shift meant no further need for the extreme high interest rates of the late1990s. Loos says, the result was

Domestically the South African government widened its fiscal deficit and the SARB cut inter- est rates to multi-decade lows in order to “keep the economic party going”. This delayed the full correction. Current real house price levels still reflect that 5%+ annual economic growth phase that we were fortunate to have prior to 2008, as well as perhaps some speculative activity and the first time buyer panic fromthat boom era. “We have reached the point where the stimulus is running out. Government has begun to raise taxes in order to narrow the deficit and curb its debt growth and SARB aims to start ‘normalising’ interest rates upwards. The world’s biggest economy, the US, looks set to do the same fairly soon. With the disrup- tive social tensions in the country, we appear destined for a 1-2% growth economy at best, instead of the pro- jected 5%.” Ultimately, he believes that real house prices have to reflect economic weakness and absence of further fiscal andmonetary stimulus. Loos concludes, “The result has been what appears to be a disappointing start to 2015 economically and the pace of residential sector strength- ening has slowed. The market still remains a ‘comfortable space’, but perhaps the time is near for lower single-digit house price growth, and for the longer term real price correc- tion to gradually resume.” ■

a major once-off downward structural adjustment in in- terest rates, which started in 1998. The interest rate stimulus was massive, with the indebted House- hold Sector able to grow its borrow- ing rapidly. This created a strong surge in demand for what were then cheaper homes. The strong double-digit house price inflation that followed, com- binedwith low interest rates, created a paradise for speculative activity, while first time buyers were con- cerned that future prices wouldmake homes unaffordable. The result was a real house price peak at the end of 2007 that eclipsed previous recorded prices in the country. Loos explains that the down- ward correction was cut short by an abnormal fiscal and monetary stimulus across much of the globe.

May 2015