Ian Fife

Banks, rates, carry trade change mood

Agent turnovers pick up, but prices don’t

Fresh leaves are beginning to form on the house market’s green shoots, says KwaZulu Natal agency chief Keith Wakefield.

“Our turnover for September is 40% up on last year, from 160 to 220 units,” he adds. “This is from the 5,5 percentage point interest-rate fall coming through.”

His fastest-recovering suburbs are Kloof, Hillcrest and Westville, clustered around the N3 highway west of Durban.

In Cape Town, Bill Rawson’s agency had 68% turnover growth in the three months to August, compared with 2008.

“The main reason for this is that people can see the market has bottomed out,” he says. “And banks’ home loan approvals have risen from 50% to 60%. A large number of cash buyers are also appearing.”

His best-recovering suburbs seem to be Brackenfell and Durbanville in the north, and Claremont in the south.

“We are definitely seeing much stronger activity in Gauteng for June to August against the previous three months, and year on year,” says Jawitz agency chief Herschel Jawitz. “Double-digit show day attendance and month on-month increases in website visitors to record highs of more than 40000 visitors a month are clear lead indicators of the upturn.”

Jawitz says sales of houses costing from R900000 to R3m are increasing fastest across a broad base of suburbs. “This is very encouraging, as I would expect these buyers to still be carrying a high debt hangover,” he adds. There is strong activity in middle- income suburbs like Parktown North, lower Northcliff, Fairland, Sunninghill, Kensington and Linden. Sales are up 15%-20%. More R5m-plus deals are being struck in Athol, Inanda, Saxonwold, Houghton and the upper end of Morningside.

However, the three agency heads see no sign yet of rising prices.

Lightstone Risk Managers has extrapolated its September index (which covers deeds office resale data to May) to August, showing price inflation returning at just 0,22% after being -2,22% in January. While bank indexes show greater falls, Lightstone is the only independent index drawing on all resales of residential properties through the deeds office.

It’s still possible that the index could turn negative for a month or two before the end of the year. But clearly the property market has again proved its defensive qualities as an asset class, and the data shows that claims by service providers — auctioneer Rael Levitt and agent Lew Geffen among them — that prices could fall by up to 40% are nonsense.

The service providers’ problem has been a dramatic drop in unit sales since the peak of the property boom in 2006. About 150 house sales in Durbanville to August, annualised to 228, means a 66% fall in turnover from the 687 sales in 2006. Kloof shows a similar fall.

This fall in turnover has cut a swathe through the house market’s service providers rather than through property owners, with estate agencies and mortgage originators particularly hard hit. Rising turnovers are throwing the survivors a lifeline.

But it’s steadily rising prices that will change a fragile turnaround to a robust upswing, eventually followed by a boom.

The first clear signs of price rises usually entice owners who’ve been sitting on the sidelines to put their properties up for sale. This keeps the initial price rises at low single-digit percentages.

Buyers move into the market in greater numbers as prices rise faster, pushing them up further.

Banks’ risk appetite grows and they approve more home loan applications, which fires up demand.

FNB property strategist John Loos believes that buying is picking up moderately and will continue. “But the pace of recovery will be constrained by the still-high debt-to-disposable income ratio,” he warns.

But FirstRand chief economist Cees Bruggemans sees another important driver of asset prices, including property, over the next 18 months — the resurgent dollar “carry trade”. Now that the world is saved, the attractions of low-return safe havens like US government bonds are diminished and “those with rising risk appetite borrow in countries with low interest rates, to invest in countries that give high returns,” he says.

They pocket the difference between the two interest rates, called a “carry”. Bruggemans says investors in the SA rand, for instance, “get two bangs for their buck, funding low while investing high and reaping the advantage of the weakening dollar, the global carry trade funding currency of choice, and boosting the value of the rand”.

As global interest rates will remain low for 18 months or more, the carry trade will continue through 2010, pushing the rand below R7/US, improving the inflation outlook and moving prime interest rates into single digits for the first time in decades,” says Bruggemans.

Asset markets should boom and the recuperation of housing will accelerate, he adds.

Loos is more gloomy about inflation falling, pointing to sticky services inflation.

Lightstone data reveals two other trends that could affect the pace of the market over the next few years.

First, sectional title sales are growing fast in suburbs that were traditionally characterised by houses on large plots.

Second, the “newlyweds” (under 35s, making up 30% of buyers but only 10% of current owners) are replacing the “nearly deads” (pensioners who are 5% of buyers and 20% of owners) in these suburbs.

“It’s because young people have become convinced that property is an excellent investment asset class,” says Rawson. They’re also more willing to take on risk and debt.

Jawitz foresees a 5% price increase on 10% more sales next year. Loos agrees.

But the carry trade and young investors mean they could be very surprised on the upside, possibly in 2010 but more likely in 2011, with prices rising back into double figures and a new threat of a bubble.

Source: Financial Mail