Downgrade builds doubt in housing market

Property economists haven't yet cut their house price growth forecasts for 2017 given the expectation that interest rates will remain unchanged for the rest of the year.

But that doesn't mean the already weak residential property market will simply shrug off South Africa's newly designated junk status.

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FNB property strategist John Loos and Absa Home Loans property analyst Jacques du Toit are, for now, both sticking to their early January forecasts of house price growth of around 3.5% for 2017 as a whole - despite President Jacob Zuma's cabinet reshuffle and the subsequent credit downgrade by ratings agencies. That compares to last year's 5% average recorded by both FNB and Absa's housing indices.

Loos bases his decision to keep his growth outlook for 2017 unchanged on his view that talk of the Reserve Bank resuming its interest rate hiking cycle this year is premature.

"Not enough has happened to justify a rate hike."

The rand has held up relatively well given the depreciation of only around 4% against the dollar since the reshuffle, he says. "This time around the rand didn't blow out as it did in 2015 following Nenegate because the downgrade has been on the cards for some time and didn't really come as a surprise to the market."

As such, Loos doesn't expect a material impact on home-buying activity, particularly given that market sentiment had already deteriorated in recent years. However, he concedes that there could be a pullback in foreign property purchasing as offshore investors adopt a more cautious view. "But foreigners represent such a small percentage of total sales that a drop in offshore buying won't affect the performance of the overall housing market."

The latest FNB figures show that foreign buying as a percentage of total sales across South Africa has ticked up over the past six years, from an estimated low of 2% in mid-2011 to around 5% in the first quarter of 2017. However, that is still below the 7% peak recorded at the height of the property boom in 2005-06.

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While Du Toit has also kept his house-price growth forecast for 2017 unchanged for the time being and doesn't expect rate increases any time soon, he has a more bearish outlook than Loos. He says it's too early to discount the possibility of foreign capital outflows and a weaker exchange rate, which will inevitably lead to higher inflation, higher interest rates and lower economic growth.

Du Toit says such a scenario will translate into increased living costs and debt repayments, prompting consumers to be more cautious in taking up further credit. "That will put a brake on housing sales and price growth and cause properties for sale to stay on the market for longer."

He believes the R2.5-million-plus price bracket is likely to be the first to see a slowdown in activity as homeowners in this sector will simply hold on to what they have and instead opt to extend or renovate. However, lower- and middle-income buyers in the R700000 to R1.5-million bracket will be the hardest hit by higher interest rates and living costs, says Du Toit.

He also expects to see a change in buying patterns, with a shift towards cheaper and smaller properties and a potential decline in residential building activity.

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Andrew Golding, CE of the Pam Golding Property group says the group has already noticed a hesitancy in the new-build market. "Buyers who are required to put down a cash deposit on a new development that may only come on stream in two years' time are seemingly reconsidering their options given the uncertain outcome of the credit downgrade."

Golding says it's too early to tell what the impact on the second-hand housing market will be. "April is usually a slow month for the market so we will probably have to wait till the end of May before we can get a sense of whether deals are drying up or if it is business as usual."

However, Golding believes foreign buyers, especially those that may have been sitting on the fence before, will now be less likely to put pen to paper.

Seeff chairman Samuel Seeff agrees with Loos that the credit downgrade has to a large extent already been factored in to trading conditions. However, the group has in recent weeks seen a dip in activity in the upper end of the market, a sector which is often sentiment-driven.

"Buyers and investors at the top end are now very hesitant to transact, most notably in the R10-million-plus range in Johannesburg and Pretoria East, as well as in the super-luxury R20-million-plus range in Cape Town's Atlantic seaboard and southern suburbs," Seeff said.

Lew Geffen, chairman of Lew Geffen Sotheby's International Realty, expects more homeowners to put buying and selling decisions on hold in the coming months.

"We'll see more homeowners playing possum in the short to medium term, riding out the turbulence until the economy improves or until they simply can no longer afford their current standard of living - whichever comes first."

The upside of such a scenario, says Geffen, is that it creates good opportunities for speculative, cash buyers to enter the market as sellers will be forced to be more flexible on prices.

mullerj@fm.co.za