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South Africa Trends vs US Housing Market

23 Aug 2011

This was said by Bill Rawson, Chairman of Rawson Properties, in a short briefing to some of his staff following his return recently from a trip to the USA, where he visited three states.

Asked to define the main trends in the US housing market right now, as he sees them, Rawson said:

Prices of distressed sales (as here in South Africa) are still up to 50% down on the previous high levels, while average prices of second-hand homes are between 25% and 30% down on the previous levels. At the end of the first quarter this year, despite signs of a potential recovery last year, US home prices were still a massive 5,5% down on the previous quarter and as yet, said Rawson, there is no sign of an upturn. The one bright spot on the market, he said, is the new house market where some price rises (at ± 3%) have been achieved despite a big drop-off in overall production from 900,000 houses per annum to 300,000 houses per annum.

At 4,5%, the average US mortgage interest rates are still at record low levels – previously they were for many years at 8,5%. This, said Rawson, along with exceptionally low prices, should be stimulating sales, but from the discussions he had there appears to be an ongoing fear and lack of confidence in the housing market that is still holding back those buyers who can obtain bonds. This lack of confidence, he said, has shown itself in statements that the property market could drop a further 5% to 20% before a full recovery becomes evident. Should the Federal Reserve abandon its QE3 relief programme, most developers and estate agents, said Rawson, see US interest rates rising to 7% plus in the next two to three years.

The difficulties currently encountered by South Africans in getting mortgage bonds are equally prevalent in the USA and, in fact, probably worse there than here, said Rawson. One major US residential developer, Bob Toll of Toll Bros, was reported in "USA Today" as saying, "If you don't need a loan" (i.e. if you are financially very strong) "you get it in a minute – but any mortgage applicant aiming for less than a 20% deposit is still likely to struggle".

As in South Africa, the rental market has benefited greatly from the financial crisis: slow sales have resulted in increased applications to rent and in improved rental prices.

There is a clear understanding in government and business circles that as long as the housing market remains stagnant, so will the US economy lack lustre. Toll was quoted as saying that this sector probably employs more than any other in the USA and therefore requires all the encouragement it can get.

Negative feelings about the potential of the USA recovery, in his opinion, said Rawson, miss the mark because they do not take into account the huge entrepreneurial drive and skills for which the country has always been well-known and which no other country – certainly not the fast-growing China – possesses to anything like the same degree. This, he said, should ensure that the USA remains a dominant economy for at least a further two decades.

Quoting statistics from the respected Canadian economy analysts, Scotia Plaza, Rawson said that the UK housing market is also as yet showing no signs of recovery.

"It took a further step back in the first quarter of 2011, following a short-lived revival last year. The year-on-year drop now stands at 4% (adjusted for inflation)."

Similarly, said Rawson, Australia's house prices in the first quarter were unchanged and therefore when adjusted for inflation reflected a 3,5% drop in real values.

In Europe, said Rawson, those economies which are struggling, notably Spain, Greece, Portugal, Ireland and to a lesser extent Italy, although in some cases experiencing a temporary upturn in 2010, are still seeing house prices deflate. By contrast, in France they were up 7% year-on-year and in Germany some 3%.

"The picture that emerges from my USA visit and from the recent global residential surveys indicates that housing in all Western countries was hammered by the global meltdown. However, South Africa did not drop back as far as many others did – and is showing signs of recovery, because even in the hardest hit districts here prices are now stabilising."

Landlord South Africa