No ‘second bubble’ for SA property market

With the real estate markets in the US and the UK abuzz with speculation that a second housing bubble burst could be on the way, the question has arisen as to whether SA could also experience a rerun of the 2008/ 09 market collapse.
 
But this is highly unlikely, says Lew Geffen, chairman of Sotheby’s International in SA, for a number of reasons, the most important of which is the fact that there is no longer a big surplus of unsold properties in the local market.
 
“Most of the properties that were in “distress” after the recession have now been disposed of through the bank-assisted sale programmes, and in fact we are experiencing a shortage of properties in many areas now because there has been so little new development over the past four years – in contrast to the over-exuberant development that was taking place prior to 2009.
 
“And housing markets only collapse when supply far exceeds demand.”
 
In addition, he says, SA’s home loan interest rates are currently stable at historically low levels, “and this takes care of the second key element required for a housing bubble to burst, which is rising interest rates that diminish housing demand. “In 2006, at the height of the last boom, the home loan interest rate was 10.5%, but by mid-2008, when the market started to collapse, the rate had risen to 15.5%.”
 
What is more, Geffen says, while SA prices are currently rising on the back of increased demand, they are only doing so very slowly, which is not the case in the US, where economics professor and recent Nobel prize winner Robert Schiller – who famously predicted the first housing bubble – recently said there was now a distinct danger of bubbles forming in several big cities.
 
According to the latest S&P/Case-Shiller Home Price Index, home prices in the US grew by an average of 12,4% in the 12 months to end-July – but there were some cities where the growth rate was much higher, like Las Vegas (27.5%), San Francisco (24.8%) and Los Angeles (20,8%). And with US mortgage interest rates on the rise now and the rate of new development speeding up, the worry is that price growth cannot be sustained at this rate and will collapse, leaving many thousands of new homeowners in negative equity as in 2008.
 
In the UK, worries about a second bubble have been sparked by the early launch of the second phase of the government Help-to-Buy mortgage insurance scheme, which critics say is akin to sub-prime lending in that it will boost prices artificially and set the banks up for thousands of loan defaults when interest rates and housing development start to rise.
 
“However, in SA we have several safeguards in place now to stop any similar scenarios from developing here,” Geffen says. “There is the National Credit Act, for example, which is very diligently applied by the banks and most other lenders to ensure that homebuyers can really afford their home loan repayments.
“And on top of that, the banks are extremely conservative now in their valuation of properties for home loan purchases, and insistent that more than two-thirds of potential buyers put down substantial deposits. In this way, they are keeping price growth in check and ensuring that most buyers have sufficient leeway if and when interest rates do start to rise.”
 
As for new development, he says, while recent StatsSA figures do show an increase in residential construction, this is nowhere near the levels reached before 2009, “and unlikely ever to be again, since the banks are also super-cautious about funding new projects, even though any new units that do come on to the market are very quickly absorbed.
 
“There is thus no way – barring an international financial catastrophe – that a housing bubble is going to develop and burst in SA over the next few months or years. Instead, the market is all set now to consolidate its recovery and resume steady growth of around 9 to 10% a year.”

www.myproperty.co.za

23 October 2013