Property Market Focus – June I July

Economist John Kenneth Galbraithwas quoted as saying that the only function of economic forecasting is to make astrology look respectable. Historically, insurance companies have used projections of expected financial returns to sell their investment policies. Forecasting has also been labeled as marketing. And when things do not turn out as expected, the advice is that – as an investor you are to take a longer term view or that the risks of a negative return are inherent in the reward provided by the investment. On the one hand we accept that it is incredibly difficult
for even the most seasoned economists to accurately forecast the financial future performance of an asset class.

On the other hand an attitude of actively watching for signs of changes to trend lines of our key economic indicators can be very instructive in allowing us to withdraw from markets that are patently over-priced and to actively seek out opportunities that provide upside potential. To this end I would like to guide you through several of my favourite
key property economic measurements to help you understand the status of our market and why good property buying opportunities are going to be around for a while.

The first key variable to watch if you are a keen property investor is a general home price index. Most major commercial banks in South Africa publish their own version and slight variations are sometimes seen, but the trend lines are the important part. The latest FNB Home Price Index shows growth of 5,3% in house prices for March 2015, down from a peak of 8,6% in December 2013. Once we adjust for inflation, real house price growth is currently recorded as 1,7%, and only kept in positive territory by a sharply lower inflation rate of 3,9%. The consistent decline
over the past 15 months is reflecting some fundamental underlying economic forces.

Prices are one of those variables that reflect  many underlying forces and remain at the top of the list of key economic indicators to watch. The second cluster of important variables are Household Debt to Disposable Income Ratio and Interest Rates. The amount of debt you have relative to your disposable income will determine your capacity to
finance additional property purchases and how the banks view your risk profile. This ratio of debt to disposable income has declined from its peak of 88,8% in 2008 to its current level of 77,6%. This indicates that households have strengthened their balance sheets and are better positioned to take on additional mortgage debt. The cost of debt is the interest rate. Our prime rate is currently at 9,25%, a historically low level and expected to remain relatively flat
for the next year. Even if we were to factor in a potential 2% increase in interest rates over the next 24 months we are still in a relatively low interest rate environment. This favours borrowers over lenders and supports the case for using mortgage debt to leverage your property investments.

The third cluster of economic indicators focus on the demand and supply of residential homes and the relative strength of these forces. FNB have an excellent measurement obtained from their valuers to measure the demand and supply rating, the difference being what they refer to as their market strength index. We have noted recently, for the first time in several years that the demand rating has exceeded the supply rating. The market strength index
measurement has been provided as 50.65 (on a scale of 0 to 100). This is as close to an equilibrium between supply and demand that can be expected and is why commentators may now refer to the market as “balanced”. The average time a property is on the market is another measure for market demand and supply strength. From the 3rd quarter 2014 low of 11 weeks and 4 days, the estimated average time on the market has risen for the past 2 quarters to
12 weeks and 5 days. The recent figures are however sharply lower than the 19 weeks and 1 day recorded at the beginning of 2011.

Two measures of housing price realism are the proportion of properties sold below their asking price and the average
percentage drop in the asking price. Data collected from FNB’s quarterly estate agents survey suggests that 83% of properties are sold at less than the asking price, as at the end of the 1st quarter of 2015. This is up marginally from the 81% recorded in the 4th quarter of 2014. The average price drop to secure a sale is currently 8% and this has
been the same for the past five quarters, but significantly less than the 13% drop recorded in late 2011 that sellers had to stomach to secure a sale.

– Andreas Wassenaar

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