Three more on the way, says Absa

A further three interest rate increases in addition to the three already implemented so far this year is being forecast by Absa in its latest Residential Property Perspective released this week, according to an article in October 29 Sunday Tribune Property Guide.

Fifty basis points rate increases - fuelled mainly by inflationary pressures, current account deficit and private sector credit extension – are expected by Absa to be announced at the Monetary Policy Committee meetings in December this year and again in February and April next year.

Such increases will lift the prime interest rate and the variable mortgage interest rate to 12,5% at year-end and 13,5% by mid-2007 which would rein in nominal house price growth to 5,9% and a price decline of 1,9% in real terms next year. This will be the first real decline in house prices since 1999.

Absa’s projected nominal increase for 2007 is substantially less than its projection of a nominal house price increase of 13,7 percent for this year over last year. An average price growth of 14,9% was recorded in the first three quarters of this year.

The average price of houses in the entire province of KwaZulu-Natal increased by 16,6 percent from R698 185 in the third quarter of last year to R814 179 in the third quarter of this year as measured by Absa.

This was more than four percent in terms of houses in the Durban/Pinetown metropolitan area, which rose by 12 percent from R755 456 to R845 779 over the same periods. Nationally the average price of a middle segment (80 sqm to 400 sqm) increased by 13,8 percent from R719 159 to R818 333 also for the same period.

The cost of building a new house increased by a nominal 10,3% year-on-year in the third quarter of 2006, compared with a growth rate of 10,5% year-on-year in the preceding quarter. This above-inflation increase in building costs, according to Absa, is a reflection of the level of activity in the building and construction sector.

The demand for building materials and skilled labour has also contributed to this development. However, the nominal year-on-year growth in building costs continued its downward trend, which commenced in the third quarter of 2004 until the third quarter of 2006.

“This can be ascribed to the large number of developers and building contractors active in the property market, which leads to greater competition. The slowing down of the residential market since late 2004 also played a role.”

The average price of a new house increased by a nominal 11,6% year-on-year to about R832 900 in the third quarter of 2006, which meant an increase of 5,9% year-on-year in real terms. The average price of an existing house increased by a nominal 14,9% year-on-year to about R820 200 in the third quarter, which brought the real price increase to 9% year-on-year.

The nominal price difference between new and existing houses, according to Absa, was stable at 1,5%, or just more than R12 000, during the first three quarters of 2006. This is the smallest price difference recorded since mid-1989. The price difference between new and existing houses has declined sharply since mid-2003, when it reached an all-time high of R173 200, or 31,2%.

Article by: Rodney Hayter - www.rodneyhayter.com