Property prices taper off

February 28 2005 at 06:09PM

The massive growth in property prices is now tapering off leaving the property market at risk of over-trading, property specialists warned on Monday.

"Year-on-year growth in house prices in the fourth quarter was down on the previous quarter - and this is for the first time since the second quarter of 2002," said Glen Mollink, a group executive at eQuals, a player in the property market.

House prices have risen 147 percent since the first quarter in 2000. "This type of growth is not sustainable," said Mollink in a statement.

Mollink said he does not expect the market to crash, but said it "appeared to be levelling out".

Christopher Riley, the founder of property website, took a more pessimistic view, cautioning that the property bubble could burst, as it was running the risk of being over-traded with property investors pushing the prices of property higher.

Riley said financial institutions should be doing more to warn people of the risk of over-extending themselves when investing in property.

"If a person happens to have invested in property and has a property portfolio of, say, R2-million and is paying bonds totalling R20 000 per month, with an income from rentals - after expenses - of R18 000, then his property investments are costing him R2 000 per month.

"In the current benign interest rate climate this is a good situation to be in, but if rates increase by five percent to 16 percent, then, all of a sudden, the repayment costs will rise to R32 000, meaning he will suddenly have to subsidise to the tune of R14 000 - that is a jump of a colossal 700 percent," Riley said.

Mollink added to Riley's warning, saying: "People who have bought second and third properties as investments to rent out, and who are highly geared, should be far more weary."

He also cautioned people who have taken out second bonds then used the money raised on luxuries.

"People have realised a lot of equity in their properties. Many, unfortunately, have taken out second bonds to realise this equity, believing they were suddenly well-off.

"If they used the money taken out of their properties wisely then this was not necessarily a bad move; but if they used the money to uplift their lifestyles and buy luxuries, it is likely to turn into an expensive mistake."

If inflation were to increase beyond the SA Reserve Bank's six percent ceiling, interest rates could increase.

"I really don't see us returning to massively high interest rates of 24 percent as we had in 1997/8, but... even a one or two percent hike in interest rates can push highly-geared property owners over the threshold.

"And this is because the majority of people, be they normal home-owners or small and large property investors, tend to buy without taking into account any rate increases," Riley said. - Sapa

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