The residential market continues to have an oversupply of property, FNB said on Thursday in its June house price index.

"Interest rate cuts may well have totalled 450 basis points since December, but this has had no more than a marginal impact on property demand to date, it would appear," FNB's property strategist John Loos said in a statement.

The rate of deflation for June came in at -10.2 percent year-on-year, compared with a revised -8.5 percent rate for May. On a month-on-month basis, the rate of deflation was -2.2 percent for June.

Banks remained cautious, although FNB had announced a mild relaxation of credit policy. Household indebtedness as measured by the debt-to-disposable income ratio remained high due to growth in disposable income being under severe pressure in a recessionary environment.

"The high debt ratio is sustained by disposable income growth falling at a faster rate than household credit growth in recent quarters."

Therefore, the pressured household sector was unable to respond nearly as aggressively to rate cuts today as it did in 1999 and 2003 when indebtedness was far lower.

Price deflation had, over time, become increasingly widespread, with the so-called affordable segment being the most recent casualty, Loos said.

"The affordable segment's decline in price inflation since 2006 has been a sharp one and it is conceivable that this segment is where severe financial strain had been building up."

FNB's property barometer supported this notion, with survey respondents from low income areas reporting a greater percentage of sellers selling in order to downscale due to financial pressure (33 percent) as compared to the higher income areas.

"Less skilled labour often comes off worse in economic downturns than the more supply-constrained highly skilled labour that supports the higher end of the market and this would be especially so when it is the likes of manufacturing and mining that are currently in deep recessions."

There was a theory that in tough times the affordable segment would be least affected, because demand dropping out of the segment would be replaced by demand shifting down from higher income/price segments in search of greater affordability.

However, in these current times of financial stress, it was plausible that many distressed sellers and prospective first-time buyers simply did not buy, but rather moved into the rental market.

Loos added that former black township property behaviour displayed a similar weakening trend to the overall affordable segment.

"Although not in house price deflation yet, these areas appear pretty close.

"The affordable segment, not so long ago the star performer, is thus possibly the key cause for concern at present, having peaked last in the cycle.

"It possibly has to battle more than others due to the more severe recessions in certain industries that employ a significant number of affordable segment clientele."

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