The Standard Bank median house price index (smoothed) decreased by 1,5% year-on-year (y/y) in March, following declines of 3,6% y/y in January and 2% y/y in February, the latest Standard Bank property gauge showed on Wednesday.
“After posting the lowest annual growth rate in 12 years in 2008 when a decrease of -0,3% in the median house price of Standard Bank’s property book was reported, the first three months of 2009 extended the downward trend,” said Standard Bank’s Johan Botha.
The trend cycle of the March data confirmed that the weakness in the property market is set to continue longer.
“In real terms, using our estimate of the CPI in March of 8,3% to deflate the nominal house price, the decline in real house prices comes to approximately 9,8%,” said Botha.
He said that the smoothed growth rate of residential property prices for March 2009 shows that the value of the median residential properties financed by Standard Bank was R542k.
“The overall state of the economy early in 2009 and the medium-term outlook are such that an immediate, significant improvement in the housing market is decidedly improbable.”
Looking ahead, Botha said that it is evident that households find economic and financial conditions extremely challenging, while the tightening of lending criteria by financial institutions makes it more difficult to access finance.
“Over the short-term, economic conditions are expected to deteriorate further, but positive developments on the inflation front will lead to additional interest rate cuts in 2009,” he said.
Standard Bank expects a further 250 basis points relief in interest rates this year.
It is anticipated that house price growth will be negative over the short- and medium-term, but likely to improve somewhat towards the end of the year as the impact of interest rate cuts filter through the economy and the property market. – I-Net Bridge
Property economists have painted a rather gloomy picture of the prospects for the residential property market in the years ahead, although the situation is not as dire as predicted by one major estate agency earlier this week.
John Loos, First National Bank’s property strategist, says the list of negative influences on the residential property market is long, and includes rising interest rates, increasing inflation, a slowing economy, the impact of the National Credit Act, the electricity crisis, low income yields and the recent xenophobic violence.
Loos has projected a 21-percent decline in the value of new mortgage loans and re-advances granted for this year and says we are entering a period of house price deflation.
“South Africa’s new mortgage market grew in value by almost 900 percent from 1999 to 2007 and house price inflation over the past decade was a few hundred percent,” Loos says.
He says this means the current downturn in the property market is not the end of the world. However, because the list of negative factors affecting the market is longer than he had previously anticipated, Loos says the magnitude of the downturn would be more extreme than previously forecast.
Lew Geffen, the chairman of Lew Geffen Sotheby’s International Realty, was quoted earlier this week as saying that property prices could fall by up to 40 percent from last year’s highs.
However, property economist Erwin Rode, of Rode & Associates, says estate agents tend to equate market activity with changes in house prices. Although the number of house sales could drop by as much as 40 percent in the year ahead, this does not automatically mean that house prices will fall by the same percentage,” Rode says.
“I expect that by next year or the year thereafter, residential property prices will have fallen by about 10 percent from current prices,” he says. According to Rode, the bleak outlook is not likely to disappear overnight and property prices could hit rock bottom by 2010.
Geffen was quoted in daily newspapers this week as saying that his prediction of a 40-percent drop in house prices is borne out by the fact that banks are only offering mortgages where clients put down a five-percent to 25-percent deposit.
He says Absa, for example, is only providing 100-percent home loans for properties valued up to R800 000. For properties priced from R800 000 to R2.7 million, Absa will provide a 95-percent loan and, if the property is priced between R2.7 million and R4 million, the bank is only providing a 90-percent loan.
No straight line
However, Jacques du Toit, Absa’s senior property analyst, shares a similar outlook to Rode’s.
“You cannot draw a straight line between the deposit banks are asking mortgage owners to pay and a possible drop in house prices. There is much more to the calculation and it’s simply not that straight- forward,” he says.
Du Toit says he does not foresee a 40-percent drop in prices across the board in the next year.
“While we do expect the downward trend in house prices to continue, it definitely won’t be to the extent stated [by estate agents],” he says. Du Toit says he expects the downward trend to bottom out late in 2009, with a slight sideways movement before the property market recovers very gradually from 2010.
Du Toit says the factors that have to be considered when looking at the property market include inflation and interest rates.
“Inflation is likely to remain quite high for some time and so will interest rates. The housing market is interest rate-sensitive, and people are likely to sell despite the fact that they are going to get lower prices than they would have a year ago. This applies particularly to people who bought property as speculators with the intention of selling later at a high profit,” Du Toit says.
Mortgage bond repayments have already increased 32 percent on the back of nine rate increases since June 2006. According to Du Toit, overdue mortgage loans as a percentage of total mortgage loans increased from a low of one percent at the end of 2006 to 1.5 percent at the end of 2007, and probably increased again this year.
However, they are still well below the average of 6.6 percent recorded in 1999 after interest rates went as high as 25.5 percent in 1998.
Sizwe Nxedlana, the property economist at Standard Bank, says inflation is expected to remain above the Reserve Bank’s target band of three to six percent for the next three years.
Nxedlana says further interest rate increases will mean that fewer people will pass the affordability test for new mortgage bonds, fewer mortgages will be granted and registered, and growth in house prices will be less likely.
Rode says there is usually a lag of nine months between a change in interest rates and a change in house prices. “If you take into account that we are expecting two more interest rate hikes and then are looking at an effect on house prices nine months after the last interest rate hike, we are looking at an extended period of stagnation, if not a decline, in prices,” he says.
Many sellers are still expecting to obtain unrealistic prices for their homes, based on the high price growth of the past few years. Rode says sellers need to drop their asking prices to more realistic levels.
“When you are making a buy-or- sell decision, you should never consider the historic cost of the house, as this is irrelevant.
“For example, if you bought a house for R2 million six months ago, the price you paid then has nothing to do with the price you will get for the same house if you sell it today. People assume they must get a better price than the price they paid, but that’s not how the market works,” Rode says.
How you can survive the property blues
High interest rates and high inflation are here to stay for a while. It is unlikely that we will see a drop in either in the near future, property economist Erwin Rode, of Rode & Associates, says.
If you do not urgently need to sell your property, you should sit out the drop in the market over the next two years at least. This means if you have a strong cash flow, are able to meet your mortgage bond repayments and do not need to sell – for example, to avoid repossession – you should not try to sell your property right now.
If you have bought a property for investment purposes, Rode says, you should put it up for sale and get out of the market as soon as possible.
The residential property market is not likely to be a good investment for the next five years, he says.
Many property owners who took on a mortgage bond of 100 percent or more over the past five years are likely to face a negative equity situation in the next 18 months, Rode says.
Negative equity means you owe more money on your mortgage bond than the actual value of your property. If you have bought a property as your primary residence, this does not necessarily present a huge problem, because all you have to do is ride out the next few years and make sure you are able to meet your mortgage bond repayments as they increase in line with interest rates.
However, you would be well advised not to take out any further loans against your property in the near future, because, should you be forced to sell your home in the next two years, it is unlikely you will obtain a selling price that will cover the entire mortgage amount you owe.
Rode says now is a good time to renovate your home, because small builders are being hit hard. “Small builders are under pressure and looking for work. You will probably get better quality work done on your home now, because small builders are more likely to look after their customers in the current environment,” he says.
If you are looking to buy a property, Rode says you should not be in a hurry. You should ideally wait a year or two, because you are likely to pick up a better bargain as the property market gets worse for sellers.
Fixing your home loan interest rate may prove the more costly option for you
You may be thinking about fixing the interest rate on your home loan to avoid dealing with further interest rate hikes and the stress of higher mortgage bond repayments.
However, Mokgatla Madisha, a fixed-income analyst at Investec Asset Management (IAM), cautions that this may be a costly decision. “You could end up paying more in interest than if you were to ride out the [interest rate] cycle,” he says.
Although he agrees with property economists that inflation is likely to remain above the Reserve Bank’s target band of three to six percent “for a while”, Madisha does not think South Africa is facing a situation of ever-increasing inflation and interest rates over the next two years. Instead, he says, inflation is likely to be elevated over the medium term.
“A year from now, interest rates could start to fall, but they are not going to fall very fast, neither are they going to fall very far,” he says.
Madisha says fixing your interest rate for two years could mean that you are stuck paying off your mortgage bond at 16 percent in 2010 while inflation could have fallen back to six percent and interest rates could be reduced to 12 percent.
Banks generally offer you the opportunity to fix your interest rate at about half to one percentage point above the prime rate – currently 15 percent – for a period of up to two years. A variable interest rate linked to the prime rate is usually anything between one and two percentage points below prime.
The disadvantage of fixing your interest rate now is illustrated by the following examples:
- Homeowner A, who has a mortgage bond of R1 million and who pays an instalment of R11 715 a month at prime minus two percentage points – that is, 13 percent – decides to ride out the interest rate cycle. If it is assumed that interest rates are raised by one percentage point at each meeting of the Reserve Bank’s monetary policy committee in June, August and October, and then stay level until May 2009, the prime rate will be 18 percent by October, and Homeowner A will be repaying R13 912 a month on an interest rate of 16 percent.
- Homeowner B, who also has a mortgage bond of R1 million, chooses to fix his home loan at prime plus one percentage point now, which will result in his monthly repayment increasing to R13 912.This means Homeowner B will immediately have to cough up every month what Homeowner A will start paying only in October. Over a full year, Homeowner B will be paying about R6 000 more.Madisha says IAM does not foresee a three-percentage-point hike in interest rates during this year.
“We anticipate a further one to 1.5-percentage-point-rate hike until the cycle peaks, which would mean that the homeowner on a fixed rate is even worse off. He could be stuck for another year at the fixed rate, while those on a floating rate, or a rate linked to the prime rate, could start enjoying the respite of lower interest rates.”
Authored By: Neesa Moodley-isaacs
Published By: persfin.co.za
Pretoria – House prices, excluding the effect of inflation, dropped by 5 percent year on year in April, which is the biggest decline since March 1997.
Absa, which released its latest house price index yesterday, is now forecasting for the first time that real house prices will slip this year and next year.
Jacques du Toit, a senior property analyst at Absa, said the forecast had been changed because of the upward movement in interest rates, which were still expected to rise further this year and would have a major effect on the growth in house prices, and inflation ticking upwards.
House prices have now declined in real terms for three consecutive months, according to Absa’s house price index.
Negative real growth of 1.5 percent was recorded in February, 3.4 percent in March and 5 percent in April.
February was the first time real house prices had declined since June 1999.
Du Toit said the real price of a middle segment house had dropped by 5.7 percent to about R614 400 in April from an all-time high of about R651 600 at constant year 2000 prices in August last year.
The average nominal house price had declined by R4 000 over the past three months.
Absa said nominal house price growth dropped further last month to 4.3 percent year on year in the middle segment of the market from a revised growth of 5.5 percent in April.
This was the lowest nominal year-on-year price growth recorded since October 1999, when it was also 4.3 percent.
Homebuyers have now shifted their focus to smaller and more affordable properties.
The release of the house price growth slump news coincided with this week’s warning by Lew Geffen, the chairman of Sothebys International Reality, that house prices were expected to drop by about 40 percent by the end of this year.
Other major estate agency businesses reported that sales volumes were about 30 percent lower, housing stock available for sale had doubled in the past five months, buyers had declined and that banks had tightened their lending criteria.
Du Toit said developments on the inflation front, together with recent comments by Reserve Bank governor Tito Mboweni that drastic measures were needed and that the bank was now forecasting CPIX (consumer price index minus mortgage costs) inflation to decline to the 6 percent level again only by 2010, were expected to result in the monetary policy committee hiking interest rates by 100 basis points next week.
He said there was the risk of further rate hikes later this year if the CPIX inflation rate remained stubbornly high.
“In view of these developments and expectations, activity levels in the residential property market, and both nominal and real house price growth, are forecast to slow down even further in the rest of 2008 and into 2009,” said Du Toit.
“In real terms, house prices are expected to decline this year compared with 2007, with a further real decline projected for next year.”
Authored By: Roy Cokayne
Published By: Business Report
Based on the latest Absa House Price Index, house price growth dropped further to a nominal 4,3% year-on-year (y/y) in the middle segment of the market in May this year, down from a revised 5,5% in April. It was the lowest nominal year-on-year price growth recorded since October 1999, when it was also 4,3%, and
brought the average price of a middle-segment house to about R960 700 in May.
In real terms, house prices in the middle segment of the market dropped by 5,0% y/y in April 2008, compared with a decline of 3,4% y/y recorded in March, based on headline CPI inflation. This was the biggest real year-on-year drop recorded in house prices since March 1997, when it was at a level of -5,2% y/y, based on nominal price growth of 3,9% y/y, and a headline CPI inflation rate of 9,6% at the time.
On a month-on-month basis, revised nominal house price growth was negative to the tune of 0,1% between March and May this year, which was the first nominal month-on-month price drop since January 1999. As a result, the average nominal house price has declined by about R4 000 over the past three months. In real terms, house prices dropped by a further 1,9% in April from March. The real price of a middle-segment house
has dropped by a total of R37 200, or 5,7%, from an all-time high of around R651 600 (at constant 2000 prices) in August last year to about R614 400 in April this year.
CPIX inflation rose to 10,4% y/y in April, driven by the usual factors of high oil prices and food inflation, and exchange rate movements. Fuel prices were raised further to record highs this week, which should keep inflation under upward pressure in the near term. As a result, inflation expectations will remain high over the short term, which are expected to contribute to higher wage demands this year. Moreover, if the food and fuel price components are excluded, the CPIX inflation rate continued its upward trend to reach a level of 6,1% y/y in April – an indication of secondary inflationary effects present in the economy, which are of great concern to the Reserve Bank.
These developments, as well as recent comments by the governor of the Reserve Bank that drastic measures now need to be taken, and the fact that the Bank is now forecasting CPIX inflation to reach the 6% level only by 2010, are expected to see the Monetary Policy Committee hiking interest rates by a full 100 basis points next week (11- 12 June), with the risk of further rate hikes later this year if the CPIX inflation rate remains stubbornly high.
In view of these developments and expectations, activity levels in the residential property market, and both nominal and real house price growth are forecast to slow down even further in the rest of 2008 and into 2009. In real terms, house prices are expected to decline this year compared with 2007, with a further real decline projected for next year.
Compiled By: Jacques Du Toit
Published By: Absa Home Loans
According to the latest Absa House Price Index, property price growth slowed to a nominal 6,8% year-on-year (y/y) in the middle segment of the market (see explanatory notes) in April 2008, down from a revised 7,8% in March. It was the fourth consecutive month of single-digit growth in nominal property prices since a growth rate of 11,2% was recorded in December last year. The latest price rise of 6,8% y/y was the lowest since November 1999, when it was 6,5%, and brought the average price of a middle-segment property to about R974 000 in April this year.
In real terms, property prices in the middle segment of the market dropped by 2,5% y/y in March 2008, compared with a decline of 0,9% y/y recorded in February, based on headline CPI inflation. This was the biggest negative real year-on-year growth rate recorded in house prices since May 1997, when it was at a level of -3,4% y/y, based on nominal price growth of 5,7% y/y, and a headline CPI inflation rate of 9,5% at the time. On a month-on-month basis, nominal property price growth was only 0,2% in April, unchanged from March. In real terms, property prices dropped by 1,3% in March from February. The real price of a middle-segment property has dropped by a total of R19 700, or 3%, from an all-time high of around R651 500 (at constant 2000 prices) in August last year to about R631 800 in March this year.
Sharply rising CPIX inflation, currently at 10,1% y/y and mainly driven by international oil price, rand exchange rate and food price trends; the 450 basis points worth of interest rate hikes since mid-2006 on the back of inflationary pressures; a significant slowdown in growth in real household disposable income in 2007; and the full implementation of the National Credit Act in mid-2007, are factors having a negative effect on the affordability of property. These trends have caused the focus of homebuyers to have shifted from luxury, large and expensive properties to smaller and more affordable properties in recent times. As a result of these developments, the downward trend in year-on-year house price growth has accelerated since September last year.
With inflation still under strong upward pressure, inflation expectations will remain high over the short term, which will have a significant influence on demands for higher wages this year. Against this background, the Reserve Bank’s Monetary Policy Committee is expected to hike interest rates by another 50 basis points at the June meeting. In view of these developments and expectations, property price growth is forecast to slow down even further in the rest of 2008 from current levels. Nominal price growth of well below 10% is projected for the full year, with real price growth expected to be in negative territory, which will be the first annual drop in real prices since 1999, when it was -0,3%.
Compiled By: Jacques Du Toit
Published By: Absa Home Loans
The residential property market is currently under immense strain and sellers are struggling to get the prices they want.
But whether SA house prices are currently in a plummeting phase, is a question to which there won’t be an answer in the foreseeable future.
Standard Bank’s economics department sent shock waves through the market last week with an announcement that during March house prices dropped for the first time in eight years. They were also 5,2% lower in the same month last year.
Just a few days later, Absa’s house price index, which is widely accepted as credible and which has been in the market much longer than Standard Bank’s index, indicated that house prices were 8,7% higher last month than in the previous year.
Although this index still indicates the growth in prices, the trend is clearly downward.
An announcement such as the one made by Standard Bank can cause great harm to confidence in the market and should be judged with great caution.
The reason for the difference between the two house price indices and the tremendous confusion they create is the different ways in which the index is calculated.
Absa has been using the average house prices to calculate its index. Two years ago, when Standard Bank decided to also publish its own index, the decision was made to use the median price instead of the average price.
In layman’s terms, the median price means the ‘middle’ price. For instance, the sixth price from the top is the median price if eleven houses are being sold in a month. Five are therefore cheaper and five more expensive.
Standard Bank defended its choice of the median price when it released its index, as a result of the fact that one or two exceptionally high prices have the ability to skew the average.
Absa’s defence was that exceptionally high or low prices are excluded from its index by default in order to eliminate such distortion.
Only houses that are larger than 80sq m (currently selling for R400k) and houses cheaper than R2,3m are included in Absa’s index.
However, the issue is that the median house price can also easily be distorted.
If, as agents allege, a greater number of cheaper houses and a smaller number of expensive houses are being sold, then the middle price will lie somewhere between the cheaper houses.
It is therefore possible that Standard Bank’s price index is indicating a greater number of cheaper houses being sold, rather than house prices necessarily dropping across a broad spectrum.
This suspicion is confirmed by Standard Bank’s own analysis. The middle price of the bottom three quarters of the list was R295k last month, as opposed to R350k during the same month last year.
However, the middle price of the top quarter was R950k in March this year, as opposed to R900k last year.
According to this estimate the lower end market is starting to struggle, while the middle market, which Absa is largely measuring, is still heading upwards in accordance with Absa’s price index – although not by much.
It will be interesting to see whether other price indicators are also saying that the lowest sector of the market, which includes the affordable market, is also experiencing increased price pressure.
It is true that people are buying cheaper houses because they are currently unable to afford more expensive ones – which will bolster the prices of cheaper houses – but the buyers in the lower segment of the market are usually also the hardest hit by rising interest rates and spiralling inflation.
So what do agents think of the confusion? Dr Andrew Golding, CEO of the Pam Golding Group, says the group’s point of departure is still that if a house was sold for R1m last year, it will fetch a price of R1,1m or slightly less this year.
The perception of the falling prices was probably caused because the gap between the prices that sellers expect and that which the buyer is prepared to pay, is growing.
For instance, someone who bought a townhouse for R350k five or six years ago, is now placing the townhouse on the market for R1,3m and is then disappointed when it ultimately only fetches R1,1m.
The price it fetched might not have met the seller’s expectations, but it’s not clear whether it’s an indication of falling prices. The sharp rises during the recent years have often created unrealistic expectations with sellers.
Golding says the current market conditions indicate that the residential property market has moved in the direction of a buyer’s market. “Sellers are much more conservative with their offerings.”
Buyers are also being forced in this direction due to the fact that they don’t qualify for the same large mortgages as before because of the rising interest rates and the stipulations of the National Credit Act (NCA).
“In this scenario, sellers should adjust to realistic, market related prices in order to lure buyers, who now have a larger range of properties to choose from than before.”
The number of properties being sold is currently 20% lower than a year or so ago.
Ronald Ennik, Pam Golding Group director and managing director for the Gauteng region, says sellers’ perceptions of their properties’ market value is still so unrealistic that he, in certain instances, advises his agents to convince their clients to lower the mandate price by as much as 20%.
He says the interest in property has indeed waned, but that the market is nowhere near the 1997 situation when show houses drew very few potential buyers.
“There are still very busy show house days in Gauteng, despite the downturn.”
However, agents are performing five times more valuations than last year. This can indicate that after the strong growth in the value of properties over the last decade, some home owners want to convert this growth into money.
“However, the problem is to keep their expectations realistic.”
Authored By: David van Rooyen
Published By: SakeRapport
In February 2008, year-on-year growth in house prices in the middle segment of the market (see explanatory notes) slowed further to a nominal 8,7% from a revised 9,9% in January. House price growth has not been so low since the end of 1999, when it was 9,3%. These trends in house price growth are according to the latest Absa House Price Index, which indicates that the average price of a middle-segment house was about
R969 800 in February.
In real terms, year-on-year price growth was down to only 0,6% in January from 2% in December. This was the lowest real growth since the 1,4% recorded in September 1999. Against the background of nominal house price growth continuing to decline, whereas inflation is on a rising trend, real year-on-year price growth may turn negative in the near future. The last time that house prices declined in real terms on an annual basis, was
back in mid-1999.
On a month-on-month basis, nominal house price growth remained stable at 0,3% in February from January. In real terms, house prices declined by 0,8% in January from November, which was the largest monthly real decline since January 2002 when it was also 0,8%.
The slowdown in year-on-year house price growth has accelerated since September last year, mainly driven by further interest rate hikes in the second half of last year, a significant slowdown in growth in real household disposable income up to late 2007, 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.
The outlook for inflation does not appear to be positive over the short term, taking account of the latest trends with regard to the international oil price, the rand exchange rate, and food price inflation. The CPIX inflation rate is forecast to rise to a level of above 9,0% in the near term, which poses a risk to interest rates. However, against the background of consumer demand slowing down over a wide front, the Reserve Bank’s Monetary Policy Committee is not expected to hike interest rates at their next meeting in April. The forecast is for interest rates to remain unchanged in 2008. In view of these developments, house price growth is expected to slow down even further this year from current levels.
Compiled By: Jacques Du Toit
Published By: Absa Home Loans
Reduced affordability had caused house price increases to stagnate, Standard Bank economist Sizwe Nxedlana. Nxedlana said the slowdown in the demand for residential property in the form of a noticeable reduction in the volume of mortgages granted and the stagnation in house price growth were primarily a function of reduced affordability.
“The 400 basis points increase in interest rates between June 2006 and December 2007 in an environment of record-high household indebtedness has placed the South African consumer under strain.” Nxedlana stressed that evidence that consumers were under pressure had not only become manifest in weaker demand for housing and house price growth, but in reduced spending as well. He said the short-term outlook for residential property remained bleak. Standard Bank’s median house price index at R570 000 last month recorded a zero year-on-year growth rate for the third consecutive month.
Excluding the National Credit Act-induced outlier of R620 000 in June last year, the monthly Standard Bank medium house price has been “range bound” between R550 000 and R599 000 since December 2006. Nxedlana said the rigidity of the medium house price in this range; the stagnation of house price growth and the lower demand for housing highlighted the headwinds facing residential property. There had been a downward shift in the lower-quartile house price and an upward shift in the upper-quartile house price, he said. The lower quartile is the value below which 25 percent of the sample data falls while the upper quartile is that above which the upper 25 percent of the sample data lies.
“The lower quartile house price on our mortgage book was R350 000 in February 2007 and declined to R300 000 in February 2008. The upper quartile house price increased from R880 000 in February 2007 to R960 000 in February 2008 with the median house price intact at R570 000. A similar trend was evident when comparing the quartiles for January 2007 and January 2008,” he said. Nxedlana said increased public sector fixed investment would improve the performance of the economy in the medium term, with positive consequences for consumer spending and residential property.
Published By: Business Report
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
According to the latest Absa House Price Index, nominal year-on-year (y/y) growth in house prices in the middle-segment of the market (see explanatory notes) slowed to a level of 11,2% in December 2007 (12,5% y/y in November), which brought the average price of a house to almost R964 000 at year-end. This was the lowest price growth since December 1999, when it was 9,3%. House prices were up by 14,5% in nominal terms in 2007 compared with 15,2% in 2006 and 22,6% in 2005.
Real year-on-year price growth was only 3,8% y/y in November (5,3% in October) – the lowest real growth since the 4,2% recorded in December 2002. In the first eleven months of 2007, real growth in house prices averaged 7,5% y/y. The real growth rate is based on the headline consumer price index (CPI).
On a month-on-month basis, nominal house price growth slowed further to 0,3% in December from 0,4% in November. In real terms, house prices were unchanged in November from October.
On the back of exchange rate and oil and food price movements in recent months, inflationary pressures in the economy have mounted further, causing the CPIX inflation rate to rise to a level of 7,9% in November last year, which is well above the 6% upper limit of the inflation target range. This was the highest CPIX inflation rate recorded since the 8,5% of April 2003. Inflation is expected to remain under upward pressure over the
short term in view of an oil price of just below $100/barrel and the rand exchange rate edging on R6,90 to the US dollar. These developments may lead to a further increase in fuel prices next month on the back of the current under-recovery in both petrol and diesel prices. Against this background, CPIX inflation is forecast to peak at a level of well above 8% in the first quarter of 2008, which does not bode well for the interest rate outlook over the short term.
Growth in nominal house prices is forecast to taper off somewhat further in 2008 after the downward trend in price growth accelerated towards the end of 2007. Nominal growth in house prices may drop to as low as 9% in 2008, largely driven by the tightening of monetary policy since mid-2006, the impact of the National Credit Act on the growth in credit extension to consumers, as well as an expected slower pace of economic expansion and lower growth in real household disposable income during the course of the year.
Authored By: Jacques Du Toit
Published By: Absa Home Loans