Residential property hasn’t found a bottom yet

FNB just released its “Property Barometer.” It shows that the bust continues to play out in the highly levered sector. This sector lives on credit growth. Ask yourself, what would you be able to pay for a house if you couldn’t get a mortgage loan?  That’s right, the amount you could spend on a house is about the same you could put down as a deposit for a mortgage loan, absent willing lenders. That’s not much (sorry for being a bit presumptious and brash, but there aren’t many people that can pay cash for a residential home today.)  If mortgage lending doesn’t pick up very substantially very soon, the local residential real estate market may drop off the edge of a cliff.

Also note that FNB says that

“Examining estate agents’ near term expectations, and the influencing factors for their expectations, it is evident that they are implicitly citing financial pressure on households as well as a lack of further interest rate cutting in 2011, as key influences…

Whereas in the 1st quarter survey interest rates were cited as the key (positive) influence on expectations, the 2nd quarter survey saw interest rates fall back sharply into 4th place in terms of their importance as an influence on perceptions. Most prominent in the latest survey was “Economic/Financial Stress and General Pessimism” as a driver of near term expectations…

Coupled to the above, regarding economic/financial stress, agents believe that there has been a rise in the significance of selling “in order to downscale due to financial pressure”, from 22% of the total number of sellers in the 1st quarter to 25% in the 2nd quarter. This reason for selling must be seen as providing strong support for supply of property on the market. Some would argue that a sale in order to downscale due to financial pressure should be followed by a purchase of a cheaper property shortly thereafter, negating the boost to supply of property after the initial sale. However, agents believe that around half (51%) of sellers selling for financial stress-related reasons actually exit the market and move into property rental for the time being, thus leaving something of a gap.”

Household finances are under pressure, and will remain so for a while.  The lack of levered buyers means credit extension will remain anaemic.  This means there will be little money supply growth, which means CPI inflation isn’t going where mainstream economists say it will (above 6% in 2012), and if anything may go lower. It means we will still see interest rate cuts from the SARB later this year and possibly even into 2012.

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