Why the holiday property market is struggling

HILTON TARRANT: John Loos is strategist at FNB Home Loans. John, an interesting report out by FNB last week, looking specifically at the second quarter FNB estate agents survey and some of the findings there, something consistent with what we’ve picked up with a month or two ago with Ewald Kellerman, your colleague at FNB home loans. The percentage growth or rather the demand on the growth of house prices in holiday towns versus the major metros, an interesting comparison to look at at the moment, given the state of the economy, given the point in the cycle, how are you reading the demand and the price increases that we’re seeing in the metros versus the holiday town markets?  

JOHN LOOS: Well, Hilton, what we tend to find is the demand is more cyclical in holiday towns, as one would expect. So, in bad economic times, demand pulls back faster than in the more stable metro areas because holiday buying is non-essential. Primary residential buying, which drives your metro markets overwhelmingly, is much more necessary for many people, so it’s more stable demand in the metros. So, what we saw was from when we started the survey question on the percentage of buyers believed to be holiday buyers throughout the country, that was up at around about 5% in 2007 when we stared the survey. It slowed down to 1% at this stage last year and then this year we’ve just had something of an up tick, it is obviously relatively thin volumes compared to a year ago but as a percentage of total buying this holiday property buying rose by 3%. So, it seems to have improved somewhat in the holiday towns as people come out of their shells after the recession but not enough yet to eliminate our calculated price inflation differential. Major metros still growing, price wise, by 4.4% in our estimates but the holiday towns still substantially weaker at minus 5% year on year. So, still that price differential between the two regions.   

HILTON TARRANT: John, just in terms of the survey, very easy to guess which the six major metros are where you are basing your comparison. Holiday towns – what sort of areas would you include in that definition? 

JOHN LOOS: Well, there’s a whole long list of them but we try to…and it is a bit subjective, admittedly, let me start with a place like Umhlanga, which used to be a holiday town, I’ve eliminated that because it’s very much part of the Durban Metro now. When you go out further, it’s debatable, do you still include Ballito or not? We do, we think there’s a significant amount of holiday demand but it is becoming more of a commuter town. Then when you go down the south coast, you get to the Scottburghs and beyond, the Margates being big ones. Down into the southern Cape it would be the likes of Jeffreys Bay, Plettenberg Bay and Hermanus. Then up the west coast, the likes of Langebaan. But not only the coastal ones, we also include Clarens and a couple of the inland ones as well. 

HILTON TARRANT: Just in terms of these figures, if you dig into them, are the amounts of stock available in those towns a primary driver of the kind of movement we’ve seen in prices and in metrics such as average days on the market? 

JOHN LOOS: Yes, the stock on the market probably differs quite substantially. I think in your older, more established holiday towns where perhaps land availability isn’t so big, you might not have had as big an oversupply. I talk about, for example, Hermanus, which I think is quite limited in terms of land availability, relatively so. But where you did see big oversupplies created, up the west coast, Langebaan seemed to be the case. Towards the Eastern Cape, Jeffreys Bay definitely seemed to be the case. Where big building booms happened during the boom years because of greater land availability, it was more affordable in those towns for the person hoping to get on to that holiday property ladder, to get in there. So, big oversupplies in some of those towns, yes. 

HILTON TARRANT: Just looking at the House Price Index out today, acceleration in July but an interesting one to look at, over the past couple of months, given that we had impacts of a number of public holidays in March, April and May, might we see a more normalised figure in the months of, perhaps, June, July August? 

JOHN LOOS: When you say normalised, Hilton, what would you mean? 

HILTON TARRANT: Just as a figure that wouldn’t be affected as much by the amount of days or the amount of public holidays, the mount of external influences that we saw in April, as well as May. 

JOHN LOOS: Well, one must remember, there’s normally around March / April, the public holidays are normally very significant every year. Although this year Easter did move back into April, so it’s possible that our acceleration in the House Price Index growth rate to 4.6% in July reflects something of an increase in demand after an abnormally holiday-ridden April. But I think the driver of this acceleration goes further back into the summer months, we had the two interest rate cuts late last year and I think that just, apart from the normal seasonal summer demand, I think something was added on to that by those rate cuts. Our estate agents survey in the summer quarter was reporting it and that’s the lagged impact of that, I think, coming through into the year on year house price growth now, rather than the public holidays of April. 

HILTON TARRANT: We are seeing the impact though of this lower interest rate environment and despite what seems to look good on paper, given that we have interest rates at a multi-decade low, you do point out that there’s still a very firm anti-speculative bias in the market. One would have thought that a number of South Africans who maybe had a little bit more income to invest would maybe be speculating in the property market right now but your research seems to suggest that they aren’t. 

JOHN LOOS: Well, I think there probably are a few, there probably always are but what a lot of speculators require…when you’re living off borrowed money, what is nice is when you’ve got strong capital growth, now the boom provided it, the boom got started by economic and interest rate fundamentals and primary residential demand and all the good things. Then it created strong capital growth and then you get a group of speculators that climb in to ride the trend, in other words, they’re bargaining on that they can borrow money, buy a home now and even in six month’s time or a year’s time, a short period of time, can make a handsome profit and repay the loan just purely because of this capital growth that exists. Now, at the moment, prime rate’s at 9%, you might get a loan, if you’re lucky, slightly below that but with house price growth only at 4.6% that is negative in real terms if you use the house price inflation rate to adjust prime. It’s really no good from a short-term speculation point of view if you want to borrow money and make a shot term profit. 

HILTON TARRANT: John, just to close off with, that figure of 4.6% year on year growth, does seem a lot better than the figures we saw possibly a few months ago and during last year. But you do point out that the residential market, there will still be a fair amount of pressure on the residential market, given the economic conditions we’re seeing, the higher oil price, administered pricing increases, very slow growth in credit demand at the moment, how are you seeing that play out? 

JOHN LOOS: Well, I think at the moment, look, it’s difficult to call a double dip. Although I don’t think the double dip recession for the world economy is off the table yet, some do but I think it’s still a risk. But tough one to call but I think what we’re seeing, if you look at key global leading indicators, most of them seem to be pointing to a slowdown. The world’s biggest economy, the US, leading indicator has been pointing down for a while. They would forget about the debt agreement or the debt ceiling agreement, which has been reached, they have to grapple with the problem of zero percent interest rates, so not much more stimulus to give, a very high level of indebtedness, which they have to work down by cutting their fiscal deficit. Then on top of it, oil prices over the past number of months have been substantially higher and the US is an oil guzzling economy. So, the world’s biggest economy I think is under pressure, already its growth has slowed to pedestrian pace in the first half of the year and this affects the world economy, not to even mention Europe’s problems, which are quite significant. So, it’s looking like slowdown economically in South Africa as well, we’ve seen the leading indicator, over the past few months, declining. The housing market is as much about the economy as it is about interest rates because that puts pressure on household income and the ability to buy houses. So, I’m less concerned about interest rates, I have a feeling that the Reserve Bank may postpone any interest rate hiking for quite some time but it’s more about the weakness in the world economy and signs of weakness in our own economy, which I think could put increased pressure on the housing market in the second half of the year. 

HILTON TARRANT: So, very much a buyers market at the moment if at least those buyers can afford it. 

JOHN LOOS: Well, it’s always tough to say buyers market. Yes, it’s a relatively weak market and you can drive a hard bargain but, of course, a lot of buyers or would-be buyers under financial pressure themselves and it’s important, I think, in these tough times to buy well within your means. Yes, some do still believe interest rates will go up later this year or early next year and ultimately interest rates always do go up. But it’s not only about that, it’s also about all the costs being heaped on to housing, we know about Eskom and we know about municipalities. So, in these tough economic times, tough financial times, I think it’s always good to buy within one’s means if one is entering the property market.  

HILTON TARRANT: John Loos is strategist at FNB Home Loans.

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