Slowdown in property price growth accelerating amidst power cuts
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Growth in house prices in the middle-segment of the market (see explanatory notes) slowed to a nominal 9,1% in January 2008 – the lowest price growth since December 1999, when it was 9,3%. Nominal price growth of 10,6% y/y was recorded in December last year. These trends in house price growth are according to the latest Absa House Price Index, which indicates that the average price of a house was about R962 000 in January.
Real year-on-year price growth was only 1,5% y/y in December 2007 (3,4% in November). This was the lowest real growth since the 1,4% recorded in September 1999. In 2007, real growth in house prices averaged 6,9% (10,2% in 2006), based on an annual average headline consumer price inflation rate of 7,1% (4,7% in 2006). On a month-on-month basis, nominal house price growth of just 0,1% was recorded in January from 0,2% in December. In real terms, house prices declined by 0,7% in December from November, which was the fourth consecutive month of real decline on a monthly basis.
The slowdown in house price growth has accelerated since September 2007, mainly driven by deteriorating market conditions on the back of further interest rate hikes in the second half of last year, significantly slower growth in real household disposable income in the first three quarters of the year compared with 2006, and the full implementation of the National Credit Act in mid-2007, which saw a tightening of lending requirements applicable to consumers and financial institutions. In view of these developments, house price growth may slow down further this year from current levels.
Although it is still early days and the full impact is still to be determined, the electricity crisis that gripped South Africa since the beginning of the year may have a negative effect on overall production, fixed capital formation, employment, income and consumption. This will be reflected in the country’s economic performance, with growth in real gross domestic product expected to dip to below 4% this year, while costs may be pushed higher over a wide front. Higher costs will to some extent be passed on to the end user, namely the consumer. This may add to further upward pressure on inflation, which implies that interest rates will probably have to remain relatively high for some time, having a further dampening effect on consumption and economic growth.
The housing market is not expected to escape these developments unscathed. The acute shortage of electricity may dampen and even halt new housing developments, which may cause the demand for existing housing to increase, causing price growth to accelerate on the back of demand and supply conditions. However, the affordability of housing, already a major issue for many prospective homebuyers in especially the low- and middle-income categories, will become even more important against this background, as well as factors such as the National Credit Act, inflationary pressures, high interest rates, and slowing household disposable income growth. This situation may cause homebuyers to consider even smaller, more affordable, and probably higherdensity housing in future. Residential properties having alternative sources of electricity as well as
those being “greener” in general, will also be high in demand and may carry a price premium.
With the building and construction industry and related sectors expected to be adversely affected
by the possible lack of new housing developments, there may be some relief in the form of a larger
focus on the alteration and renovation of existing residential buildings, with homeowners finding it
more difficult to upgrade to more expensive properties as a result of the affordability factor.
Compiled By: Jacques Du Toit
Published By: Absa Home Loans
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