Falling interest rates to boost house prices
House price growth, which has been on a downward spiral, is expected to improve somewhat towards the end of the year as the effect of interest rate cuts filters through the economy and the property market.

After posting the lowest annual growth rate in 12 years last year, when a decrease of 0,3% in the median house price was recorded, the first three months of this year extended the downward trend.

A Standard Bank residential property report released yesterday showed that the median house price index decreased 1,5% annually last month, for the 10th successive month, following declines of 3,6% in January and 2% in February.

"The trend cycle of last month's data confirmed that the weakness in the property market was set to continue longer" said Standard Bank economist Johan Botha.

He said that in real terms, using the bank's estimate of the consumer price index last month of 8,3% to deflate the nominal house price, the decline in real house prices came to about 9,8%.

"The smoothed growth rate of residential property prices for last month shows that the value of the median residential properties financed by Standard Bank was R542000" Botha said.

A significant moderation in house price growth started in the middle of 2006 when the upward phase of the interest rate cycle started. The 500- basis-point increase in the repo rate between mid-2006 and mid-2008 placed huge strain on the economy, particularly on mortgage holders.

Putting pressure on house price growth were high levels of household debt, the reduced affordability of housing, made worse by higher mortgage rates, high food and fuel prices, a sharply slowing economy and the implementation of the National Credit Act.

The number of mortgage application approvals declined significantly from November as the industry wide loan-to-value restrictions reduced the ability of households to access finance.

Botha warned that the weakness of the economy should not be taken lightly. "From a demand-side perspective, equally worrying trends are emerging" he said.

The challenges facing the housing sector are highlighted by statistics showing a rising number of insolvencies and liquidations. Banks have reported significant increases in bad debt. Households owe banks R1,2 trillion, most of it in the form of mortgage advances.

Botha said positive developments on the inflation front would lead to additional interest rate cuts this year. The Reserve Bank expects inflation to average 8,1% in the first quarter of this year and then to decline to below 6% in the third quarter. Standard Bank expects relief of a further 250 basis points 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" Botha said. - Inet Bridge

Article by: THABANG MOKOPANELE from: www.iolproperty.co.za