FNB stated on Friday that the current property recovery may be relatively short-lived and of limited magnitude. FNB repo list contains many repossessed property priced below market value. The year 2010 could show a small peaked increment in the property cycle, the bank said in a statement. According to FNB home loans strategist John Loos, the interest rate cut being kept at 7% has led to the question: how much further can the residential market recovery go? This basis point drop provided some room for people to buy private property or repossessed property, repossessed property being the more attractive option.

“For the time being, it appears to be comfortable with the repo rate at seven percent,” Loos said. It appeared that rates were now settling down for a lengthy sideways movement and Loos said his view was that prime would remain at 10.5 percent until the second half of 2010 prior to the start of the next hiking cycle. Loos said the stimulus for residential property was not quite running out but said the possible end of rate cuts might point to the current property recovery being short.

“There exists a common belief that interest rate cuts take up to 18 months to fully work through into an economy, and this seems not a bad rule of thumb to work on. In the third quarter, FNB’s Residential Property Barometer activity level rating showed a more impressive uptick than in previous quarters, which suggests that the stimulus of recent rate cuts is still feeding through into the market and has some way to go.”

However, Loos said for an interest rate sensitive market such as the residential property sector, an 18-month rule would imply that 2010 would gradually start to see this source of support run out — assuming there were no further rate cuts. “Then, it will then be over to the economy to provide increased support for the residential property market through improved growth.”

Loos said there were signs in both the local and global economies that the recession was fading. “But we should be mindful of the fact that both in South Africa and in the US, household financial fundamentals are not sound,” he said.
The household sector’s debt-to-disposable income ratio was currently at 76.3 percent.

“The result of this high level of indebtedness relative to income is that households cannot take on new debt nearly as rapidly as was the case during the past rate cutting cycles of 1999 and 2003.” This implied that households both in South Africa and in places such as the US could not be expected to spend the property market or the economy to far more impressive levels of growth, Loos said.

However, he believed that the recession was coming to an end and a forecast of around two percent real economic growth was a realistic expectation. Loos said it would take around four years for important household sector debt fundamentals to improve but in the meantime, the high debt ratio curbed the pace at which the household sector could grow its borrowing, and thus the pace at which housing demand could grow. He added that 2010 could well represent the next “mini-peak” in the current residential market recovery, especially if interest rate hikes towards late next year transpired.

“This is perhaps a little disappointing to many, with our average house price inflation forecast expected to measure a mere five percent for next year as a whole.” Loos said it would take one more set of interest rate hikes and that thereafter, when rates ultimately started falling once more in the next cycle, the household sector would once again be on a firmer financial footing. “That firmer financial footing is what residential property relies heavily on, and it is unfortunately a slow process to get there,” he said.

It seems as if you will still be able to acquire repossessed property as well as private property at low cost for at least another the coming term. An easy way for finding available private property and repossessed property that are currently for sale is by browsing the Myroof website. It contains properties advertised by selling owners as well as the FNB repo list’s repossessed properties.

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