1 Mar 2014
An increase in the banks’ risk appetite in the form of greater willingness to provide higher Loan-to-Value (LTV) bonds might increase the house price inflation outlook for 2014, according to Lightstone.
Paul-Roux de Kock of Lightstone explains that not only do banks determine the risk premium charged on potential property buyers, they also determine the maximum loan amount a buyer qualifies for.
If this loan ceiling is below the property seller’s asking price the potential buyer will have to cover the remainder with a deposit, he says.
Furthermore, he points out that loan amount granted relative to the transaction price of the property is referred to as the “Loan-to-Value” (LTV) of the transaction. During the housing boom it was not uncommon for mortgage applicants to receive mortgage loans with a value equal to, or larger than the property’s purchase price.
Therefore, 21.6 percent of housing applicants received a loan of less than the purchase price of the property between 2005 and 2008, however, this value increased to 46 percent during the housing crash and has remained between 39 percent and 42 percent since 2009, according to De Kock.
“Potential increases in the number of property sales will have to be largely financed by banks which are still less likely to cover higher LTVs to the same extent as they did before 2008.”
This means that in the absence of increased risk appetite by banks, we expect the amount of buyers to remain at similar levels to 2013 and therefore don’t expect increased market activity to drive up house price inflation, he notes.
De Kock points out that while interest rates and economic growth are key drivers of house price inflation, it is the effect on bonds and total housing transactions that should be studied carefully.
“The demand for housing in general, especially for first-time homeowners, is to a greater extent influenced by the banks’ willingness to provide loans.”
Lightstone data shows that the total number of housing transactions and mortgage bonds issued annually has remained fairly constant over the past three years at 235 000 and 122 500 respectively, while the total Rand value of transactions and bonds has, however, increased by roughly 24 percent over the same period.
“This is substantially higher than the 15 percent average growth recorded in house prices and this is due to the bigger impact of high value property transactions that take place in luxury markets where house price inflation was more subdued.”
FNB says the latest increase in interest rate has a positive side to it in the sense that it will probably curb any possibility of short-term speculative behaviour mounting.
Assuming banks’ lending strategies don’t tighten significantly over the next year, De Kock says they expect the total transaction value and value of newly issued bonds to hold this trend.
According to ooba data, property prices and bond sizes showed steady growth in January with the Average Purchase Price recording R956 112, up 6.9 percent y/y and 2.4 percent month-on-month, while the Average Approved Bond was R801 391, 5.4 percent higher y/y and 0.9 percent higher month-on-month. The originator’s rate for January of 68.7 percent, showed a significant increase on December’s approval rate of 65.2 percent and January 2013’s rate of 65.7 percent. Rhys Dyer, ooba chief executive officer, says January also showed strong activity in the first-time buyers' segment, with the First-time Buyers’ Purchase Price showing y/y appreciation of 9.9 percent and month-on-month appreciation of 6.4 percent at R754 487. The Average Approved Bond Size for First-time Buyers was R650 000, and of ooba’s total applications in January, 52.5 percent were from first-time buyers.
“As the market improves, and banks ease their lending criteria, it is making it easier for first-time buyers to enter the market,” says Dyer.
House price growth and price inflation Nominal year-on-year (y/y) growth in the average value of homes in the middle segment of the South African housing market remained in single digits in the first month of 2014 after tapering off during most of last year on the back of trends in the economy, household finances and consumer confidence. Jacques du Toit, Absa Home Loans property analyst, explains that the average nominal y/y price growth of small homes in January was R764 000, R1 104 million for medium-sized homes and R1 710 million for large homes.
“Against the background of these developments, consumer confidence remains low, contributing to pressure on household consumption growth and the demand for credit.”
Absa expects nominal house price growth to remain in single-digits in 2014 while real house price deflation is projected for this year, based on the combined effect of expected trends nominal price growth and inflation. Meanwhile, Lightstone data reveals that total y/y national house price growth was 7.4 percent at the end of December 2013 which was 0.15 percent above Lightstone’s optimistic forecast for last year. Lightstone forecast for residential property price inflation for 2014 is slightly lower at 6.7 percent, and unless market conditions change dramatically, residential property price growth should close between 5.6 and 7.8 percent.
“The most likely factor that will subsidise more significant growth is an increased risk appetite from the banks – their risk appetite has remained relatively stable over the past three years but this may change as banks see signs of recovery in the economy,” says De Kock.
With just over 60 percent of the total value of new residential property transactions currently being bonded the risk appetite of banks plays a major role in the demand for formal housing and can be a big driver of house price inflation.
Therefore, 21.6 percent of housing applicants received a loan of less than the purchase price of the property between 2005 and 2008, however, this value increased to 46 percent during the housing crash and has remained between 39 percent and 42 percent since 2009, according to De Kock. Current annual inflation rate is 6.10 percent and monthly is 0.51 percent, according to Lightstone. Meanwhile, the FNB House Price Index shows that the average house price for January rose 7.9 percent y/y down from 8.2 percent in December with the average house price transacted at R924 261.
However, in nominal terms, the January average price was 122.5 percent higher than the January 2004 price level, but only 16.7 percent above the December 2007 level, writes FNB’s property strategist and analyst, John Loos and Theo Swanepoel.
Loos and Swanepoel explain that in a highly credit-driven market such as the residential property market, an interest rate “surprise” changes a lot. “No longer do we expect a mild strengthening in 2014 but instead a mild slowdown in the market and while one lone interest rate hike doesn’t make a massive difference to instalment repayment values, we believe it will have a significant impact on buyer sentiment, because many aspirant buyers will know that interest rate hiking in South Africa, once it starts, normally doesn’t stop at one lone hike.” FNB says the latest increase in interest rate has a positive side to it in the sense that it will probably curb any possibility of short-term speculative behaviour mounting.
As the hype around residential property grew in recent months, and house price growth got stronger, there was perhaps an increased risk of this unhealthy form of buying creeping into the market.
They note that the most obvious forms of demand to be constrained would be those that can be considered to be “luxury items” or non-essential purchases, such as buy-to-let property and holiday homes. According to FNB, the primary residential demand will remain “king” and estate agents surveyed say primary residential buying remains at near 90 percent of total buying while buy-to-let, holiday property and buying residences for others, remains at around 10 percent.
“Given that interest rate hiking introduces an increased affordability challenge, we would expect the higher end areas to be slightly more affected.”
The performance of and prospects for the residential property market will continue to be closely related to economic growth, trends in household finances, inflation, interest rates, consumer confidence and banks’ lending criteria, according to Du Toit.
He adds that these factors will drive the affordability of housing and mortgage finance and will be reflected in property demand and supply conditions, price trends, market activity, buying patterns, transaction volumes and the demand for mortgage finance. – Denise Mhlanga