Supply growth declines as demand grows {writer: Leon Alberts }

The lower end of the South African private residential market looks to be heading for substantial shortages if present trends in the supply of new units to the market persist.

There are already signs of upward pressure on prices and if trends persist, it could increase pressure on South Africa’s already stressed social housing sector, where municipalities are typically first in the firing line.

According to Statistics South Africa, the percentage of households in the country living in formal housing owned by them increased from 53.1% in 2002 to 57.8% in 2007.

In the aftermath of the financial crisis during the second half of 2007, and the recession that followed, the percentage dropped back to 56% in 2009.

The latest figures, according to Absa, indicate that building activity in the residential sector declined further during April this year. It was more so in the sector for units smaller than 80 square metres than larger units, for which the decline seems to have slowed.

The growth for flats and townhouses has shown a significant decline on a year-on-year basis. This is the case for both in terms of the number of approved building plans and buildings completed.

According to Absa’s senior analyst for home loans Jacques du Toit, the latest building figures indicate that the building industry will be facing difficult circumstances for the short- to medium term.

Smaller units hardest hit

In the segment for homes smaller than 80m2, building plans for only 3 377 have been approved during the first four months of the year, which is 30% lower than the 8 821 units of the same period last year.

In the segment for flats and townhouses, the drop was even bigger at 46.2%, being only 2 852 units compared to the 6 173 in the previous year.

In this housing segment, there were 36.5% less houses completed; while on the flats and townhouse front, the number of buildings completed during the first four months of this year came down by a massive 57.2% compared with last year. Only 3 222 units were completed, compared with the 7 528 during the first four months of last year.

Housing market as a whole

Concerning the housing market as a whole, including homes larger than 80m2, in total there were 45.9% less units completed during the first quarter of this year compared with last year.

Du Toit attributed this situation to the likelihood that the higher density component of the housing market and lower income groups were the worst affected by job losses and loss of income, as well as a decline in investors in this segment of the market.

His sentiments seem to be borne out by the latest Adcorp Employment Index – published in late June – which showed that between April and May this year, employment fell by an annualised 6.2% with the hardest hit sector being construction, as many infrastructure-related projects for the Fifa Soccer World Cup had been completed.

Statistics South Africa’s Quarterly Employment Statistics report that measures employment in the formal sector, released at the same time as the Adcorp index, showed that in the first quarter, employment in the non-agricultural business sector decreased by 79 000; and between the quarters to March 2009 and March 2010, about 242 000 jobs were lost.

Homes less affordable

There are also indications that, despite the fact that interest rates have come down and banks eased their lending criteria, the affordability of an own home has increased.

The rise in home prices still outstrips the rise in income for those in employment.

According to Absa’s latest home price index, home prices in May this year were 15.2% higher than in May last year.

While a large number of factors impact on the affordability of an own home – such as the general economic climate, household debt levels, loan criteria and the National Credit Act – the affordability calculations have also weakened in recent times. These calculations consider the relationship between home prices and household discretionary income, and between that income and bond repayments.

The average selling price of a home is now in the order of R1 million, which implies a bond repayment of R9 650 over a period of 20 years at the present interest rate of 10%.

The nominal average annual discretionary per capita in the country during 2009 was R29 553.

Prices on the up again

While the affordability of homes has improved in the country over the past two years due to decreasing house prices and dropping interest rates, it has decreased again over the last few months.

Nominal house prices went up by 4.4% during the final quarter of 2009 on a year-on-year basis. Expendable household income, however, on average only went up by 2.7%.

The same trend applied to the ration between income and bond repayments.

To these factors can be added increased local government rates and taxes and utility bills such as water and electricity. All of these have impacted negatively on the affordability of housing.

According to Standard Bank, house prices are on a slow recovery path. Its residential property gauge for May, released on 1 June, stated that the average property price financed for that month rose to R579 000, compared with R571 000 in April. This represents an increase of 2.3% year-on-year.

“While this growth remains mediocre, the average home loan financed rose by a proportionately larger amount, providing confirmation that the sample of homes financed were more widely dispersed,” the bank said in a statement.

Danelee van Dyk, economist with Standard Bank, said that according to the South African Reserve Bank’s mortgage book for households, and adjusting for asset reclassifications that took effect over the past few months, mortgage growth had shown very few signs of improvement.

“However, even though there are still signs of financial stress among consumers, they are nowhere near the distress levels seen this time last year,” she added.