Rental strength needed for property

John Loos, FNB Home Loans strategist.

More of the same slow growth in house prices is expected, according to John Loos, Property Sector Strategist at FNB Home Loans, however a significant improvement in the residential rental market can improve the asset class's attractiveness in the near future.

Loos said that the residential property market remained very flat and looked likely to remain so for the foreseeable future. 

He said however that more rapid price growth would only make the "income stream prospects" less attractive. What appears really necessary to improve residential property's attractiveness as an asset class was a strong rental market, coupled with slow capital growth for a while, in order to significantly increase net yields on property. 

At present, there was little obvious on the horizon to suggest any marked improvement in house price performance next year according to Loos. 

Earlier this week saw the release of third quarter economic growth figures, confirming that SA had had another quarter of anaemic real economic growth to the tune of 1.4% on a quarter-on-quarter annualised basis. This was almost unchanged from the 1.3% previous growth rate, and was significantly lower than the 4.6% rate on which the year started. Loos said this could imply downward pressure on employment growth along with real disposable income growth, thus restricting residential purchasing power. 

In 2012, a real possibility existed for further interest rate reduction. Year-on-year commodity price inflation had slowed in recent months, and should do so further in the 1st half of 2012 due to high base effects and a slowing economy which exerted some downward pressure on commodity demand. 

Loos said that whilst a reduction in interest rates was quite possible, he cautioned against relying heavily on the rate changes. 

"For the property sector to place all its hopes on interest rate cuts is as questionable as the mining and manufacturing sectors hoping for a weaker rand to cure all of their ills." 

Loos said for the for the housing market's longer term health, it was important that the household debt-to-disposable income ratio be brought down to lower levels. From this point of view, the current level of interest rates was providing an ideal environment for highly-indebted households to steadily manage their situations, yet on the other hand was not able to aid household borrowing growth. 

"We have a very positive situation where household credit growth remains consistently below household income growth, translating into a declining trend in the household debt-to-disposable income ratio since early 2008. 

"The household sector probably requires a few more years of this debt ratio reduction, we expect more decline in 2012, and believe that SARB interest rate levels should be set to encourage this decline."