Why growth looks bleak despite a booming economy

In spite of a rosy forecast for economic growth of 4 to 5% for South Africa over the next five years, house-price growth is unlikely to even beat consumer inflation, says Erwin Rode of property economists and valuers Rode & Associates.

Estate agents are increasingly reporting dramatic decreases in show house attendance, longer selling periods, resulting in lower offers, and falling sales - all indications of an easing in demand.

Rode says the drop-off in demand comes as no surprise. "The growth of residential property prices to record levels over the past two years has now made it unaffordable for most first-time buyers to acquire their own homes as salaries have only increased by about 7% p.a. over the same period."

Rode says national data analysed on a quarterly basis in Rode's Report, supports the fact that the residential market is entering a levelling-off period. The Rode team expects the housing market to continue losing steam and foresees much lower house-price growth for next year.

"We are entering the downswing stage of the real residential property cycle; hence we expect the bargaining power of buyers to continue strengthening relative to that of sellers for the next few years."

Data released by Absa earlier this year gave the average house price in South Africa at R678 000, which would mean a family's joint income would have to exceed R20 000 per month to be able to obtain a 90% bond for such a purchase. "Those who could stretch their gearing to that extent have done so. Clearly these kinds of house-price levels could not have continued as they are out of reach of the average person."

The Atlantic seaboard in Cape Town is one of the areas leading the fall-off in demand with June house price sales reported by ReMax Living Atlantic to be down 33% on the June sales a year ago.

Realty1Elk CEO Mike Bester confirms that the group?s franchisees are experiencing the same trend in high-priced areas like the Atlantic seaboard and Tygerberg and surroundings, with drops in show-house attendance of as much as 70%.

According to FNB's latest Residential Property Barometer, the number of sellers countrywide who failed to realise their asking price has risen from 29% in the first quarter of 2005 to 44% in the second quarter, which suggests that the shifting of the balance of power towards buyers is a national phenomenon.

International real estate data supplied to ResearchWorld.com by S&P/Citigroup BMI Property Indices also reveals an international cooling-down in property price increases, with only 1,2% growth for the first half of 2005. From topping the gains list with 33% property price growth last year, South Africa has come down to 11th place overall with price gains of 12,7% over the first half of 2005. Cees Bruggemans, chief economist of FNB, says potential home-buyers in SA would do well to remember that the international cycle of house-price increases was led by Australia, followed by Britain and then the US. Over the past 12 months, house-price levels in Sydney have been declining steadily and in London they are already down by between 2% and 5% this year, after having more than doubled in recent years.

Whereas there was still some growth in US housing prices, it was only a matter of time before bond-linked costs start to increase and undermine sentiment. Rode says in the new global macro-economic environment, a moderate correlation has become evident between movements in the local and foreign residential property markets. The common denominator is economic growth.

"However, economic growth isn't the only driver of house prices - affordability also plays a role."

Article by: www. rode.co.za