Mortgage Bond Market
Standard Bank Home Loans

What is the latest? Standard Bank’s property book for 2009 revealed an average annual decline of 4.2% in the median home price from-0.3% in 2008. The smoothed data yielded a rate of contraction of 3.7% y/y in December 2009, followed by a decline of 2.9% y/y in January 2010.

This brings the number of monthly declines to 20 consecutive months. Significantly, the median home prices over the last four months indicated a steady, if slow, improvement in the property market. The smoothed growth rate for January shows that the value of the median residential properties financed by Standard Bank was R545 000. However, in real terms, using our estimate of the CPI in January to deflate nominal home price, the decline in real home prices comes to approximately 9.3% y/y.

The monthly median values of Standard Bank’s property book tend to be very volatile but the smoothed values show that the rate of decline is diminishing. What is also of interest from our data is that over the last couple of months there has been a sizeable increase in the number of loans granted, without a doubt supported by the loosening of credit criteria announced at the beginning of September last year.

Also encouraging, it appears that that first time buyers are showing interest in the housing market, while the loosening of the loan-to-value (LTV) restrictions is increasing the demand for lower priced properties.

Also, there is a strategic focus on the affordable housing segment, which increases the number of loans approved at the lower end of the market. This increase in appetite for lower-priced homes is biasing our raw median price downwards.

This is in contrast to our experience from November 2008 to August 2009, when the National Credit Act and fairly restrictive LTV ratios resulted in a bias towards more expensive properties acquired by cash flush homeholds. This pressured the median price of properties financed higher over most of the early part of 2009.

Economic outlook 2010:

In response to the deepest and most serious recession in 70 years, a strenuous and coordinated effort on a global scale to prop up economies appears to have been successful – most countries have emerged from the downturn with fairly solid growth prospects anticipated for this year.

Countries in the East (especially China) will lead the way, but growth in the developed world is projected to be lacklustre during 2010. It is expected that global conditions will remain testing in the first half of the year but should improve more substantially in the second half of the year.

Even though South Africa had to some extent weathered the financial storm, the consequences of the severe global recession could not be avoided. At the beginning of 2010 the impact of the recession is still present: homehold income took a sharp plunge and the increase in job losses reached worrying proportions with job losses reaching almost one million last year.

The demand for credit plummeted and is expected at exceedingly low levels at the early stages of the year. Many homeholds who have over-extended themselves during the period of low interest rates in 2004 – 2006, are still finding themselves in financial difficulties.

Of the 18.01 million credit-active consumers at the end of September last year, only 9.9 million (55%) were in good standing, while three million (17%) were more than three months in arrears, and 2.7 million (15%) landed up on adverse listings. This is a reminder that many homeholds are in dire financial difficulty and could fundamentally alter credit demand and overall spending habits in 2010.

The economy emerged from the recession in the third quarter of 2009 and is predicted to grow at an annual real rate of 2.7% in the final quarter of 2009. This provides a fairly solid start and base for the new year. Also, at the beginning of the fourth quarter of last year, banks signalled their willingness to loosen some of their lending practices.

This relaxation will gather steam into 2010 as financial and economic conditions improve. Both homeholds and businesses entered a period of deleveraging in 2009. This process is by no means complete and is likely to impact on the wider economic environment in 2010.

Furthermore, interest rate cuts seem to have run their course and it is unlikely that further cuts will be in the pipeline. In fact, there is a possibility that the upward phase of the interest rate cycle may commence once again in the last quarter of the year if the economy grows as expected.

Also ongoing in 2010 is the further filtering through of the recent cuts in interest rates (the last cut was in August last year). Relatively low interest rates, more financially healthy consumers and businesses together with an improvement in confidence in the economy, supported in no small measure by a successful staging of the Soccer World Cup, will be important building blocks for a sustainable revival of economic activity.

While the first half of the year will see a correction and consolidation playing out in the economy, the second half of the year looks more optimistic. Consumers will make a somewhat cautious return to the markets with sectors such as retail sales, services sectors and the property market benefitting from the more relaxed economic environment.

An important element in kick-starting the economy will be the build-up of inventories which have been decimated by the recessionary conditions the economy experienced. Economic growth is expected to be between 2.5% and 3% and homehold consumption expenditure (HCE) around 2% in 2010.

There are upside risks to HCE in view of income generated during the World Cup. Furthermore, there are preliminary indications that private firms are starting their hiring processes again.

The residential property market in 2010: The property market could possibly be one of the last sectors to improve when the economy picks up. We may also see that upper income homeholds may regain some risk appetite in respect of investment in property.

We expect home price growth to emerge from the red early in the year and register a growth rate in the 3% - 5% range in 2010. With real income growth envisaged at 2% this year, expectations for stronger growth in the market will be misplaced.

Summary: In spite of the economy emerging from recession in Q3 2009, important drivers of homehold spending in the economy, such as the level of homehold income, debt and unemployment, do not point to a quick turnaround in the housing market. Four consecutive months of lower declines in the median home price suggest that home price growth could turn positive by the second quarter of 2010.

 

Bond News:
Bond Originator: Standard Bank's property book for the first seven months showed an average monthly decline of 3.8% in the median house price. Standard Bank Home Loans