Gloomy Times Ahead - Or Light at the end of the Property Tunnel

I'm not one for copying content and placing it on my site, but after reading this article from FNB's home loan and property expert John Loos I think it should be shared with everyone. Is the South African property market taking a turn for the worse? Read on and see what the pro's have to say...

Copied from FNB's property market newsletter.

Although in these relatively gloomy times it is sometimes difficult to see “light at the end of the tunnel”, it is always important to remember that property runs in cycles and at some point the cycle turns.

About three-and-a-half years after the broad downturn started, I remain of the belief that we are in “the end times” with regard to the weakening trend, and that improvement is now near.

This belief is based largely on the Firstrand view that interest rates have probably reached their peak. Although CPIX inflation still runs well-above the target limit of 6%, it is more the significant weakening in some key domestic demand indicators, most notably in the area of household spending growth, which leads to our belief that the SARB may well believe that it has
done enough to cool home grown inflationary pressures.

However, some other key property fundamentals (ones which I regard as crucial to a residential market recovery) are starting to show signs of improvement.

The first one is the rental market, with letting agents interviewed in FNB’s Rental Property Barometer survey overwhelmingly pointing to strengthening in their markets and growing shortages of available letting stock. This strengthening is important in order to improve the attractiveness of residential property as an investment.

The second one is the indication of significant slowing in new residential building completions, driven lower for the most part by weak demand last year, but to be helped lower by Eskom’s capacity shortages too. This is not great from a developer point of view, but for property returns to improve it is important thatwe have a slowdown in growth of stock, and 2008 looks set to be a dismal year from a development point of view. The combination of the expected trend change in interest rate from hiking to flat, an improving rental market and a slowing development market bodes well for property returns.

I expect to see primary residential demand responding more positively towards mid-year, translating into a return to positive growth in the value of new mortgage advances, while house price inflation will probably only respond with a little more of a time lag towards the end of the year. The development cycle is only expected to pick up late in the year in terms of work in progress, which in turn would only translate into improved building completions numbers only in 2009.

The risks? Any further interest rate hikes could delay the expected recovery, while current emigration talk is a cause for concern.