No SA housing price bubble: Absa

Even though average South African house prices have risen by more than 30 percent year-on-year in the first nine months of this year, the local residential property market is considered to be in a strong rising phase, rather than experiencing bubble conditions, according to commercial bank Absa.

The residential property market has performed particularly strongly in the past few years, with a nominal year-on-year increase of 17.4 percent in house prices in 2000, followed by further increases of 14.1 percent in 2001, 15.1 percent in 2002, 21.5 percent in 2003 and 31.6 percent in the first nine months of 2004.

Concerns over bubble conditions

These strong house price increases since the end of the nineties have caused increasing concern that South African residential property is currently overvalued and fears that the market is experiencing bubble conditions, as is alleged to be the case in many other countries.

Indicators such as the house price-to-income ratio, the mortgage repayment-to-income ratio and the price difference between new and existing houses are still not at the levels reached in the early eighties, when there was also a strong property market boom.

Furthermore, a wide range of fundamentals supporting the market can be identified, many of which were absent at that time. Some of these factors will probably continue to support the property market in the foreseeable future.

Average house price

The average price of houses in the 80 square metre to 400 square metre category and priced up to R2.2-million (the previous cut-off point was R1.6-million) rose by 34.5 percent year-on-year in the third quarter of 2004. This brought the average price of a house in this category to R594 500 ($96 667) in the third quarter of 2004.

In the third quarter of 2004, the average increase in the cost of building a new house compared with a year ago was 16.5 percent. This raised the average price of a new house to R681 500 in the past quarter, a nominal 15.2 percent year-on-year higher.

The average price of an existing house was about R575 700 in the third quarter of this year, which was up 36 percent year-on-year.

The price difference between new and existing houses has been showing a declining trend since the first quarter of 2003, when it reached a record high of 31.5 percent and is now only 15.5 percent, as the price of existing houses have escalated faster than the price of new houses.

Macro-economic shock the only risk

Absa said that any so-called local residential property market bubble, should it exist, was unlikely to burst spontaneously.

A sharp downward adjustment in property prices is only likely to result if there is a macro-economic shock such as an exchange rate crisis or a considerably higher international oil price, which would lead to significantly higher inflation and interest rates in the short term.

Such macro-economic shocks are not currently factored into Absa's baseline projections.

Growth not expected to continue

The strong growth in house prices of more than 30 percent year-on-year during the past nine months was not expected to continue unabated.

Quarter-on-quarter house price growth has declined since the first quarter of 2004, which set the scene for lower year-on-year growth in the near future.

With interest rates currently near their bottom turning point, stable rates, and especially higher future rates, combined with still rising house prices, will result in higher mortgage repayments.

This will have a negative effect on the affordability of housing, which will eventually lead to lower growth in house prices, Absa concluded.

Article by: Helmo Preuss - http://business.iafrica.com