How sustainable is the property bubble?

Agents have been buoyed up by booking sales since the lifting of the hard lockdown, but analysts suspect that pent-up demand is a strong contributor to the volumes - and they say the market may level off

Property professionals celebrating the boom in housing sales should not get too excited as the current volumes might not be sustained.

Banking institutions and estate agencies have been reporting huge sales volumes since June, with some even clocking record numbers, but much of this could just be a result of demand pent up during total lockdown which will eventually level out. This demand, combined with declining house prices and low interest rates, is said to be behind the boom but it is too early to tell the proportions of each factor.

FNB has experienced a marked increase in home loan applications since the easing of lockdown regulations and senior economist Siphamandla Mkhwanazi says the intake of applications over June and last month is up by more than 20% compared to the same period last year.

But he cautions that this might not be sustainable. "I would be cautious and not overplay this rebound. Part of it may well be delayed purchases due to lockdown restrictions, rather than favourable prices and low interest rates."

Standard Bank has also seen an increase in home loan applications since the industry reopened but Steven Barker, head of lending products, says volumes are expected to moderate once some of the earlier movers and built-up demand has worked through the system.

Also, consumers are facing increasing financial pressure "which is expected to dampen the growth seen". "There's definitely some pent-up demand, but we believe that the lower interest rate environment is the principle driver of the increased activity.

"We do expect the current volumes to moderate over the couple next months as, while low interest rates will assist the market, the weak economy performance is expected to moderate consumer affordability and confidence."

At the beginning of the pandemic and national lockdown there was a sharp decline in home loan applications but since the real estate industry reopened in June, says Geoff Lee, managing executive at Absa Home Loans, there has been an encouraging increase in the number of applications month on month. While it is still too early to say whether this is sustainable, he says the bank is seeing numbers that are higher than pre-lockdown.

"We anticipate that this increased demand will be sustained as long as the buy-and-sell dynamics reflect the new status quo, where prices are more attractive, interest rates are low and buyers have improved affordability positions."

Recession still in play

Erwin Rode of Rode & Associates states in the Q2 Rode Report that the sharp cut in shortterm interest rates has boosted the residential property market. However, the interest rate cuts "will not be enough to cancel out the deleterious effect of the recession".

One of these effects is that unemployment will increase over the next few months and Yael Geffen, chief executive of Lew Geffen Sotheby's International Realty, says 80% of its sales volume is made up by employed people. "We can safely assume that the interest rates will start rising again within a year, albeit probably in small increments..."

Since June, though, the agency's sales volumes have been "very encouraging", especially at the lower end of the market in traditionally soughtafter areas. Volumes in June showed 36% growth/ escalation compared to June last year. However, she acknowledges pent-up demand "undoubtedly ignited the spark of largely unexpected activity after the hard lockdown ended on June 1" and "cannot go on indefinitely".

Volumes should level out from November. Geffen also cautions that while there has been an increase in inquiries from various websites, the gap between asking prices and buyer offers seems to be large. "Agents in some areas are battling to close that gap."

Growth in sales numbers

Alexa Horne, managing director of Dogon, says the agency has also seen high activity levels since the hard lockdown was lifted, and recorded its "best July ever" in terms of sales. This is due to a combination of favourable interest rates and pent-up demand.

Another factor stimulating activity is the fact many Airbnb property owners have been forced to sell. Ramona Reddy, property consultant at Jawitz Properties in Eshowe, KZN, believes that the pent-up demand, which is partly responsible for "impressive" sales volumes since June, will level out in the next three to four months.

"I feel that we could have high sales volumes for the next few months. Potential purchasers are now in the position of purchasing at affordable rates instead of paying towards rents at higher rates."

While built-up demand is definitely a stimulant of the higher sales volumes, Krystal Kolnik, property consultant at Jawitz Properties South Peninsula, feels that the interest rate has been the biggest driving force. She expects interest rates to remain low for the next two years.

Tony Clarke, managing director of the Rawson Property Group, acknowledges that a backlog of deals pending in May could have contributed to the flood of transactions finalised in June but says the momentum has shown no sign of slowing. Re/Max of Southern Africa has had an "absolutely spectacular" record sales month but chief executive Adrian Goslett says tough times will come when UIF and other economic relief starts running out.

"We've already seen the virus and the numbers start ramping up and that's going to have an impact ,not just on individuals, but on companies as well. You can expect to see lay-offs in different industries across the board."