Purchasing down despite better construction activity – Standard Bank
House prices edged up 7.6% year on year in July, from an upwardly revised 7.5% year on year (originally 7.3% y/y) in June. This was according to Standard Bank Research’s (SBR) House Price Inflation index which showed that freehold properties slowed to 7.7% year on year from a slightly upwardly revised 8.8% year on year in June (originally 8.7% y/y), while sectional title properties were flat at 9.8% year on year (the June print was revised from 9.6% year on year).
“This modest growth came despite subdued household credit growth, which slowed to 2.1% year on year in June from 2.4% year on year in May,” said Standard Bank economist, Siphamandla Mkhwanazi. “Within household credit, mortgages (which account for 60% of total household credit) slowed marginally to 4.1% year on year in June from 4.3% year on year in May.
“Household credit is being supported by the less weak performance of mortgages. Without mortgages, household credit would have declined around 0.4% year on year. Moreover, even though lenders are generally cutting back on credit, insofar as mortgages are concerned, the pullback has been gradual and not aggressive.”
Flats and townhouse construction leads the charge
From a supply perspective, construction of residential units has seen year to date growth of 5.1% year on year, as measured by the number of units completed. Growth in the construction of freestanding homes lags that of flats and townhouses. Year to date, the number of houses built has contracted by 4.4% year on year, in contrast to a steep recovery of 31.9% year on year in the construction of flats and townhouses. In 2015, flats and townhouses contracted by 3% year on year.
The SBR Volume Index showed that purchasing activity declined by 15.6% year on year in July – the first contraction since June 2015. More specifically, sectional title purchasing activity slipped into contractionary levels for the first time since the global financial crisis, while that of freehold properties has been in contraction since July 2013.
“Looking ahead, we see a combination of three factors playing an important role in driving property prices in the short- to medium-term: Contracting purchasing activity, which we view as being consistent with the softening of the labour market and declining disposable income; the diverging trend in the supply of residential property units, more specifically sectional title properties; as well as slowing mortgage credit extension,” said Standard Bank economic strategist, Kim Silberman. “A combination of all these factors may, in the near future, tilt the scale towards an excess supply scenario, thereby limiting growth in property prices in the short- to medium-term.”
Positively, however, the SA Reserve Bank (SARB) last month decided to pause on the rate hiking cycle. Standard Bank foresees an additional 25 basis points in interest rate hikes over the remainder of the current hiking cycle before the SARB starts cutting rates in the second half of 2017.