Auction prices dip-wider market to follow
The prices of properties sold at auction versus the rest of the market, widened in September, a signal of further house price weakness, says Auction Alliance CEO Rael Levitt.
“There was a substantial increase in the discount available on properties sold at auction last month. September is generally a quieter month for property auctions, and so the latest reading might be treated with some caution. Nevertheless, the near 40% discount is a long way below its historic average, and not far off from the sudden drops we saw in prices in December 2008”.
Levitt maintains that this suggests a significant relapse in prices achieved at auction since early 2011, and adds to evidence that the balance of power between buyers and sellers in the conventional market has begun to shift dramatically.
A comparison of the latest house price indices by various major banks and bond originators, illustrates a mixed view of the residential property market, with some predicting further falls in property prices and others predicting a gradual recovery. In spite of such conflicting opinions, the outlook of key players for the sector remains unanimously downbeat.
“The recent double-dip headlines have raised the likelihood of more property price falls. Auctions are simply where demand and supply meet, and right now supply is far exceeding demand, and auction prices are quickly reflecting this”.
Earlier this month, a survey conducted by 55 property marketers at Auction Alliance, revealed the first fall in buyer enquiries in 14 months during September. “Although we spent over R5 million marketing our properties in September, our public enquiries through our advertising metres have dropped off quite sharply, showing that investors are getting very skittish with renewed talks of a recession in the USA and the Eurozone”.
Absa reported mixed trends in their latest price index. Factoring in the rising consumer price inflation which is projected to breach 6% by the end of the year, Absa predicts low house price growth in the remainder of 2011. “Against the background of uncertain global economic conditions, a slowing domestic economy and rising consumer price inflation, interest rates are forecast to remain unchanged in the rest of 2011 and into 2012. Nominal house price growth is expected to be well in single digits for the full year and in 2012, with prices set to decline in real terms this year and next year”, says Absa property strategist Jacques Du Toit.
He believes that the conditions regarding consumer finance such as employment, income growth, ratio of debt to income and impaired credit records will have to improve further before there will be a significant improvement in demand for housing, as well as demand for and access to mortgage finance.
Given their leading position in the auction industry, the information coming out of Auction Alliance is consistent with a second leg down in house prices during the third quarter of this year. “Auction Alliance led the auction industry last year, with 30% of all the country’s properties coming under its gavels. However, this year’s prices have been dropping steadily with a recent cool-off, showing that house prices are far from their bottom point”.
FNB property strategist John Loos doesn’t believe that cutting interest rates will help the property market materially. “Our interest rates are probably at a suitable level given that our structural inflation rate is probably around where the repo rate currently is at 5.5%. Obviously, a global economic recovery would be ‘just what the doctor ordered’ to boost local economic growth and thus household disposable income. But that probably won’t happen either and South Africa shouldn’t be waiting for it. Rather, we should be implementing important structural changes in our economy in order to move it towards a more rapid long term growth path”.
Loos believes labour policy would be the most obvious port of call. Employing and incentivising labour is not easy in South Africa, and coupled with this is a need for policymakers to understand that. “Getting the set of labour incentives right in South Africa, and thus a dramatic improvement in labour performance, is the key to faster economic growth, and thus stronger property demand. These are hard policy changes that are not looking likely to happen, but this is what is necessary”.
In the absence of such positive economic-related policy changes, Loos believes that South Africa looks set to tick along at mediocre economic growth rates. “We look set to wait another few years for oversupplies to be mopped up in the residential market. In the mean time, from a return on investment in property point of view, we need residential building activity to ‘go slow’ until demand truly catches up”.
Up until October last year, Auction Alliance’s confirmation rates were sitting at around 70%, still relatively strong from the surge in sales and prices around the World Cup. It then hit the brakes, dropping sharply after the February 2011 concerns about interest rates, and has been consistently tracking down since as the market slows.
Levitt anticipates some polarisation in performance across the residential property sector to persist within coming months. With entry level homes expected to continue experiencing strong demand and activity, and activity in other sectors anticipated to remain more subdued.
“With ambiguity and conflicting views currently pervading the sector, many people are seeing auctions as a true barometer of the market. Auctions are where one finds an alignment of expectations between the buyer and seller, giving the most accurate representation of a market price”, he says.