Despite the residential market improving its risk situation quarter after quarter, the highly constrained broader economy means potential buyers continue to adopt a wait-and-see approach and negatively impact on the current sellers’ market conditions.
“The ongoing decline in the household sector debt-to-disposable income ratio, all the way from 87.8% as at Q1 2008 to 74% by Q3 2016, has lowered the vulnerability of the household sector significantly through lowering its sensitivity especially to interest rate hiking,” said John Loos, FNB household sector strategist. “Given that much of this indebtedness decline is due to a decline in the household mortgage debt-to-disposable income ratio too, this contributes significantly to lower residential market vulnerability to economic and interest rate ‘shocks’.”
While a residential market that has managed, for the most part, to protect itself from risk is a good thing in general, it does little to assist the economy in keeping its head above water. Negative perceptions and a lack of confidence weigh heavily on buyers’ and sellers’ decisions to put their homes on the market or visit show days.
In fact, last week Loos said, using deed office data, there was a year-on-year decline in the volume of new residential loans granted, posting -11% between Q3 2015 and Q3 2016.
“The rate of decline in that portion of the transfers that were bonded had reached -4.6%,” he said.
In the short to medium term, this situation plays well into the hands of homeowners who hold onto their homes as an oversupply of stock is not expected to flood the market, while buy-to-let investors should take advantage of 9% gross yields (Q3 2016) and a large pool of tenants who simply cannot afford to buy their own homes.
“A significant and widening cost gap between the more expensive new home building and existing home buying greatly curtails any possibility of ‘over-building’ and thus oversupply,” said Loos, noting that the “dismally low household sector savings rate and relatively poor levels of home affordability” left the sector vulnerable.
“The near zero-growth economy, with its major imbalances, is in a corner, and this poses very significant risk to the level of future residential demand,” said Loos.