The housing market is expected to deteriorate this year as interest rates are anticipated to rise between 1.5%- 3%p.a. during 2016.
This is according to Neville Berkowitz, property economist and adviser to low-commission estate agency, HomeBid.
“We tracked all the sales and various deeds office registrations of homes for 2014 and 2015, and established that last year 289 631 homes were sold and transferred – down 0.2% on 2014,” he says. “The average house price of R1,234,120 was only 0.94% higher than in 2014.”
Home buying and selling activity as well as house prices are expected to deteriorate this year and there are a number of factors that are going to affect the housing market. The biggest impact will come from the 1.5% to 3% p.a. expected rise in interest rates which will negatively affect mortgage affordability, while the stalling economy will limit remuneration increases and new employment across the board.
“We are at the mercy of the global economy and the issues surfacing about the structural imbalances in China’s slowing economy, the political and economic problems in Brazil and Russia’s oil price woes, make India the only BRIC’s member capable of holding up the flag for emerging economies, The sentiment of global financiers and investors is likely to continue moving away from emerging economies and favouring the safety of investing in US dollar and euro- based economies”.
“This will affect South Africa as global players will need the sweetening of higher interest rates to keep funding South Africa’s debt and its current account deficit. In addition, rising inflation due to the weakening Rand’s impact on imported goods and services, as well the drought’s effect on rising local food prices, will impact on the inflation rate, forcing interest rates higher in terms of the Reserve Bank’s policy of containing inflation”, says Berkowitz.
The reduced affordability of existing homeowners paying higher monthly mortgage amounts and the reduced affordability by first-time home buyers will translate into a buying down in the market. The buying pyramid will see more activity towards the then more affordable lower part of the market.
Mortgage lenders will tighten their lending criteria to accommodate a 1.5% to 3% per annum jump in interest rates, the impact of which is expected to reduce the number of home sales and transfers, and reflect a drop in actual home prices. The lower one goes down the home buying pyramid the smaller the impact on falling home prices.
With some 94% of the working population employed, the ability to obtain a salary or wage increase will be restricted as the economic growth will be around 1% to 1.5% per annum for the next few years, according to the World Bank.
Trade union pressure will force certain employers to provide annual remuneration increases. Reducing employment numbers are to be expected as employers struggle to remain profitable in these low economic growth times. Higher inflationary costs will push up the prices of their goods and services at a time when consumers are watching every cent they spend and higher interest rate borrowing costs will compound their woes, impacting on bottom line profitability.
On the side of good news are the falling global oil prices which should assist both the balance of payments position and, hopefully, lower pump prices, although this isn’t the case at present.
With the falling Rand South African property prices should be very attractive to foreign buyers, if they have the confidence to invest in South Africa.
“Overall, homeowners will have to adjust their expectations when pricing their homes for sale and when looking to buy with more expensive mortgage finance,” says Berkowitz. “Fortunately, using a low-commission estate agency such as HomeBid could save sellers some 5% in estate agency commission payments and probably more than compensate for the expected drop in home prices during 2016.”