Last week we looked at the very high end of residential real
estate in the country. It is now opportune to consider the very low end of the
formal residential housing market. The areas formerly classified as “Black
Township Areas” under Apartheid era classifications outperformed the former
“White Suburbs” in terms of house price growth late in 2013 according to FNB’s
Major Metro Township House Price Index. These prices rose by 7,6% year-on-year,
slightly above the 7,1% recorded for the previous quarter of this township
index and higher than the 6,2% recorded for the entire market in the 6 major
metros across the country.
The growth in Township house prices has been marginally
above the CPI inflation rate providing for some real house price growth and
represents a solid market where demand is reasonably well balanced with supply.
Because a significant portion of the country’s first time buyers enter the
residential markets via established parts of the former township markets or via
the Affordable Housing Developments programmes, we can expect economic
conditions that impact on first time buyer activity to directly impact on this
sector of the market as well. For those
who already own homes, news of increasing home prices is welcomed. However,
those who are still looking to get into the market, rising prices caused by
supply constraints would be a concern. Two major forces currently constrain the
delivery of new homes within the township markets. The first is rising building
costs. This is best measured by the Producer Price Index for Building
Materials, measured at 6,64% at the end of 2013, which is down from the recent
peak of 8,4% recorded in Oct 2013. The basic raw material inputs to housing
delivery, being cement, bricks, steel, glass and timber are expected to
experience increased upward pressure this year, which can then be expected to
increase prices of new homes and limit their supply. The difference between the
price of new builds versus existing “older” homes is best measured by the FNB
Full Title Property Replacement Cost Gap – a statistic I love to watch as it
indicates the difference between the average full title building replacement
cost and the average existing full title property value, expressed a percentage
of the existing full title property value. Currently at 22,6% this figure tells
me that it is 22,6% cheaper to buy an existing (older) home than to build a new
one. It is always going to be more expensive to build a new home than to buy an
existing home, the difference merely changes with the cycle in the property
market.
The other main force constraining the supply of new homes at
the lower end of the spectrum is the extremely low growth in employment in the
non-agricultural sector. The most recently available figures for the 3rd
quarter of 2013 show non-agricultural employment growth at a meager 0,17%. You
cannot sell new homes to people who do not have gainful employment and
disposable income.
The lower end of any residential property market is very
credit and interest rate-sensitive. The general expectation is that our prime
rate will increase to 10% from the current 9% level during the course of 2014
and then peak at 11% during 2015. Increasing interest rates have an immediate
impact on the demand for residential property across the board but particularly
for first time buyers targeting the entry level of the market.
The gradual long-term trend towards a higher
portion of the country’s households being housed in formal housing will however
continue. We have seen a gradual increase in this formal housing component from
68,7% in 1996 to 76,6% in 2012, and even though the pace is slow, it is steady
and upwards.
Published in The Bugle, 2 April 2014, Author: Andreas Wassenaar
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