After three years of withering sales and slumping prices, the most common question that I am asked about residential property is when the market will rebound.
According to many suburban estate agents, who are proficient in selling an optimistic outlook, in certain metropolitan areas the market has already bottomed out, with both sales and prices on the rise, and distressed real estate on the decline.
In fact, there has been neither an economic nor a property recovery of any significance. Auction Alliance’s end of year report card predicts that the property market should defer any prospects of improvement for at least another 18 months. 2012 will most likely see further house price lethargy and contraction. The luxury and leisure residential markets remain the most beleaguered, with entry level housing offering the bright spot on an otherwise murky horizon.
Even in an industry well versed in positive marketing speak, no-one can claim that the residential property market has endured anything other than a bruising 2011. As buyer demand cooled universally, concerns about global sovereign debt heightened and weak prospects for the local economy spooked investors of all types. 2011 was in fact a daunting year for South African real estate, and a clear path to recovery did not reveal itself. From an Auction Alliance perspective, we saw a distinct cool off in demand from the third quarter.
There is, however, a contrarian view which flies in the face of the persistent gloom that has nagged the residential market since 2008, when the sub-prime crisis flared globally, and started affecting our local housing sector. Some industry analysts cite a number of reasons, supported by selective analysis of industry and bank data, which could positively affect the recovery such as rising employment prospects and others unique to the post-credit bubble era such as distressed sales.
In the UK, which has a general negative outlook for the macro-economy, a different view can be found. “It has become increasingly apparent to us that the pieces for a housing rebound next year are beginning to fall into place,” declared Barclays Capital analyst, Stephen Kim, in a recent note to investors. Proponents do admit that the nascent rebound could easily be derailed, but stress that after years of efforts to support sales and prices, as well as the volatile impact of property distress, the market has regained a measure of normalcy.
Locally, the Sandton area is not only ripe for recovery, but there is a need to start building units soon to keep up with demand, and with the exception of really hard-hit sectors, parts of the South African market are indeed ready to turn around.
Nevertheless, given the false-starts of previous years, the economy’s sub-par performance, a new wave of distressed properties and the spectre of the European debt crisis; skeptics still overwhelmingly outnumber the optimists.
The catalysts to recovery are mostly the same: residential rents have now risen enough for prospective home owners to consider buying, existing-home inventory is the lowest in five years while that of new homes is at a 20-year low, affordability is at a record high and delinquencies have peaked. For investors, with a continuation of the gold rally in question, real estate is beginning to look like a viable inflation hedge alternative, while rising rents mean greater profits.
This may help explain why we are seeing more groups of residential property investors, who function as a broad barometer for the housing market, and these private funds and wealthy individuals are starting to build up large residential property portfolios.
We believe there is sizable housing demand that could be released into the market. There is an undeniable shortage of housing and we are forecasting that new home sales at the bottom of the market will rise 5 percent in both 2012 and 2013; prices will edge up 2 percent in each of those two years, with a 4 percent jump in 2014.
A turnaround in the housing market will require continued improvement in the employment market. The economy needs to create and self sustain. Only with an improving employment picture will there be a boost in housing demand and sale prices.
The wild card right now is an impending wave of newly distressed properties yet to hit the market. It is unclear how many properties are within the shadow market, but conservative estimates put the number at over a 50,000 this year. Still, of the top 20 suburbs which will be affected by distressed sales; nine are in Gauteng, five in the Western Cape and four in KZN, so the impact will be fairly localized and concentrated.
Another question is whether that wave of distressed properties will come as a tsunami or merely a breaker. If the market is in fact going to recover in 18 months, why would banks want to weaken it again by deluging it with cheap properties?
You could see them trying to gauge the market like speculators, and many bankers do feel that the level of distressed real estate is exaggerated and perhaps misunderstood.
There are now two kinds of buyers in the market; those who’ll take a chance on a bargain-priced, distressed property, and those who’ll only make a conventional transaction. Even if the banks decide to move their inventory more aggressively in 2012 – and I suspect they will – it’s OK because the buyer is making a distinction. There’s a ready appetite for these investment properties, and I believe that there is substantial pent-up demand for housing in general, but with this, also great uncertainty. If one can relieve consumers of some of that uncertainty, then I can see a nice little recovery.
That’s the psychological dimension of the wild card – the negative feedback loop that has plagued housing.
Optimists say most of the uncertainty and fear is gone, but this must be balanced with the intangible fatigue with bad news, and a desire to end the negative feedback loop. The major driver of negative sentiment was that prices were going down across the market by large amounts while buyers desperately needed to see stabilization.
A contributing element to price stabilization is the opening of funding by banks – whether to artificially spur demand – or boost their own balance sheets, which will open the market to a quicker recovery.
Personally, I think it’s a bit premature for an all encompassing turnaround, although I do see little indications here and there. Transaction volume is improving, but prices are still under pressure. This isn’t going to be one of those spiked robust recoveries. We are echoing the conventional industry calculus: that price increases follow sales growth amid consistently strengthening demand.