The past few months have seen increased speculation surrounding the real estate industry with various articles published by individuals who based their views on insufficient real inside information to substantiate and support their findings.
The latest International Monetary Fund (IMF) report inflamed the bubble speculation further. The IMF reported that most countries that recorded a 5-year price increase similar to what was witnessed in the Namibian market also experienced a severe bust in the housing market during the recent financial crises.
Housing demand driven by economic fundamentals
The observed increase in the demand for housing in Namibia is driven by observable economic fundamentals. We strongly believe that the demand is first and foremost driven by the lack of serviced land and the lack of funds from various councils to facilitate the provision of serviced land. The local market continues to battle a persistent shortage with current levels of supply providing insufficient houses for the growing population. The City of Windhoek is expected to exhaust its supply of serviceable land as early as 2018. This means that all remaining available land will lie in the hands of private individuals. The prevailing land shortage coupled with the taxing NAMPAB and Council approvals processes contribute further towards the poor delivery of serviced land.
Government’s plan to address the country’s shortage of low-income housing is based on the existing estimated shortage of 100 000 units that is increasing by some 4 percent annually. The number is expected to be higher for Windhoek due to increased urbanisation. Furthermore, it should be understood that this initiative would only address the existing and growing shortage of low-income housing.
It is not intended to create a surplus stock and will have no impact on the house prices of the medium- and high-income household segments. While the government plans to provide large volumes of low-income housing will lower the median price, this alone cannot devalue your home.
Against this background, we are convinced beyond reasonable doubt that the increases in housing prices are not an indication of a house price bubble, but merely a reflection of changing true economic fundamentals.
Secondly, we believe that house prices in Namibia are based on the aged-law of supply and demand. The population of regions such as Khomas and Erongo are growing rapidly due to increased employment in industries such as construction, mining, and fisheries. Urbanisation continues to drive demand upward, overtaking supply.
Thirdly, property has become an attractive investment tool for many. Increased levels of investment have also driven prices upwards and with sound credit regulation policies in place, investors have achieved strong growth in this sector in recent years. Household debt to disposable income has increased over the past few years. The increased debt coupled with recent increases in interest rates, electricity and water costs indicate that a potential strain is expected on the housing market.
Causes of property bubble (international experience)
The accession by the IMF regarding the observed trend in the housing bubble lacks correlation to the Namibian situation. The main contributing factor to the financial crises/property bubble in America was that the regulators allowed financing of 150 percent of the value of the property at below prime interest rate. This stimulated the market through the reckless financing of investment properties.
When the market dynamics changed, customers were no longer able to afford their home loan instalments. In Namibia, this trend is very unlikely as the Bank of Namibia ensures stability in the banking sector through its implementation of policies regulating the loan to value ratios allowed on property-backed borrowings. The soon-to-be implemented rules for second and third properties with increasing deposit requirements and restrictions on re-gearing on existing property portfolios will place further limitations on the investor market.
The shortage of serviced land will ensure that demand continues to outweigh supply, thereby minimising the risk of a bubble, but developers should take cognisance that house prices cannot continue to increase year-on-year, as affordability is being put under pressure. The increasing size of the middle-income market as well as urbanisation versus the insufficient supply will continue to impact property values purely based on the aforementioned economic principals. Government has furthermore requested the introduction of a rental control board, to manage rental rates in accordance with the Estate Agents Board Act of 1976. This would likely drive investors away from the property market as their returns will be reduced and other investment products (shares and annuities) again become attractive. As the price of construction will likely increase with CPI and with the returns on investment in property being increasingly regulated, the construction of new houses will slow considerably resulting in a further market shortage and in effect achieve the opposite of what Government intended. In my opinion, the market can self-regulate to acceptable levels should the processes and procedures for making land available for development be significantly reduced from the current estimated 24 months to a more acceptable six months. This will then work to rectify the imbalance currently in the market.
The current influences of elevated interest rates, world economic uncertainties, NEEEF as well as rental board implementation have put doubt in many investors and end-users to invest in property. We see that 2016/2017 will be a difficult year in the property market, but then again everybody needs a roof over their heads.
Manus Grobler is Standard Bank’s Head of Commercial Property Finance.