Runaway house prices get stuck

The boom is over for some, but money’s still being made as the cheaper end of the market plays catch-up, writes Chris Needham

THE overall residential property market has finally stagnated — but there is still rampant growth at the cheaper end of the market, and the smaller the house, the stronger the rise in price.

That’s according to two property reports released this week.

The latest Standard Bank Residential Property Gauge shows house prices nationally were 8% higher than they were a year ago, in November 2005.

The median house price in South Africa was R540000 in November 2006, the report states. This means half of all houses in SA are more expensive, and half cheaper, than this amount.

(This is not to be confused with the amounts listed in other property indices, which look at the average price of houses and can be distorted by the sale of very expensive houses.)

Standard Bank property economist Elna Moolman told Money this week that November’s rate of growth was the same as October’s, “so house prices are stagnating, as we expected.

“I don’t think there’s any risk of house prices falling but they will remain at these high levels for the next six to nine months.”

Individuals’ incomes must rise to catch up with the sharp rise in house prices over the past few years before prices can rise further.

However, while growth in the top end is slowing down fast, the bottom end is very buoyant, said Moolman.

“Soweto, for instance, has exceeded the aggregate growth substantially — growth has sometimes been as high as 50% this year, year on year.

“The top end of that market is booming. Soweto estate agents don’t even list some of their properties because they sell in as short a time as two days.”

Moolman said this strong demand was a result of strong income growth in the lower-income segment of the market.

Soweto property prices appear to be playing “catch-up” to the rest of SA, having only started accelerating in 2005 — when the rest of the country had already begun slowing down.

Moolman explained: “A lot of jobs have been created in LSMs 3, 4 and 5.

“There are now more people in income brackets where they can afford to buy a house.

“The recent interest rates hikes haven’t had much impact on this section of the market yet.”

Moolman said the first two interest rate hikes this year constituted a 9% hike in people’s bond repayments — but people’s income has been growing at 8% on average, so many homeowners had absorbed those increases.

Also, despite the average home loan instalment having risen sharply, the ratio of instalment to income hasn’t increased dramatically.

However, Moolman said the impact of the October rate hike was starting to be felt. This week’s trade data scare has been broadly interpreted as meaning that interest rates will have to be increased this week.

Moolman said Standard Bank expected one 50-basis-point increase this week, with a high probability of a further half-point hike next year.

A report by mortgage risk management company, Lightstone Risk Management, specifically on trends in Gauteng property, shows that since January 2005, sectional title properties have shown pedestrian growth.

Prices have increased by slightly more than 12% for small sectional title properties (of less than 70m²), and less than 10% for larger sectional titles.

Freehold properties have seen far greater price appreciation, but again with most growth in smaller homes.

Lightstone’s report shows that in Gauteng small freehold houses (erf sizes of less than 400m²) have shown price growth of up to 80% since January 2005.

Medium-sized houses (erf sizes of 400-800m²) have seen price growth of more than 35% while large homes (800- 1200 m²) have been poor performers at little more than 15%.

The report confirms the trends evident in Standard Bank’s report: the more affordable the property, the more its price has increased.

Properties valued at less than R250000 have grown around 33% since January 2005.

Units between R250000 and R700000 have grown just more than 30%.

Properties up to R1.5-million showed growth of 17% and expensive houses (more than R1.5-million) grew by 15%.

Properties on secure estates — such as Dainfern, Fourways Gardens, Cedar Lakes — also showed strong growth in price of more than 50%.

Anthony Miller, CEO of Lightstone Risk Management, said: “What is interesting in this trend is that people seem to be increasingly valuing space and security. The recent strong growth in the economy is making these estates affordable for more people.”

House price update

  • According to the latest Standard Bank Residential Property Gauge, houses were only 8% more expensive last month than in November 2005.
  • The median house price in South Africa was R540 000.
  • The prime interest rate was 12%.
  • In the second quarter of this year the ratio of household debt to household income was 70%.

Article by: Chris Needham -