The slowdown in the demand for residential property in the form of a noticeable reduction in the volume of mortgages granted and the stagnation in house price growth are primarily a function of reduced affordability, according to Standard Bank’s March 3 Residential Property Gauge.
The 400 basis points (bps) increase in interest rates between June 2006 and December 2007, in an environment of record high household indebtedness, has placed the South African consumer under strain.
However, some analysis suggests that the deterioration in affordability has had a more adverse impact on the lower end of the residential property market. Evidence of a consumer that is under pressure has not only become manifest in weaker demand for housing and house price growth, other components of consumer spending are also under severe pressure.
Retail sales registered negative year-on-year growth in November and December while the market for new passenger car sales is in a recession. Furthermore, the number of new cars priced between R120 000 and R250 000 grew by 84% between 2003 and 2006, falling to 57% in 2007. In contrast the number of cars sold in the R250 000 to R450 000 price range grew by 104% between 2003 and 2006 and accelerated further to 108% in 2007. Sales of cars priced above R450 000 accelerated by 109% between 2003 and 2006 and by 110% between 2003 and 2007.
It seems, according to the gauge, that the upper end of the market for new passenger car sales has also outperformed the lower end of the market as monetary policy has become tighter.
“The short term outlook for residential property remains bleak due to the fact that consumer spending will remain subdued in the near future. As expected, there was no material fiscal policy relief for the embattled South African consumer from last month’s budget. The continued deterioration of the outlook for inflation also reduces the odds of lower interest rates in the short term that would have provided relief to the consumer and therefore to residential property.
“However, there were elements of last month’s budget which suggested that the prospects for residential property will improve in the medium term.”