According to the latest Absa house price index, released on Thursday, South African house prices in the middle segment of the market slowed to a nominal 6.8% year-on-year (y/y) in April from 7.8% y/y in March, taking growth to an eight-and-a-half year low.

This is also the fourth consecutive month of single-digit growth in nominal house prices since a growth rate of 11.2% was recorded in December last year.

The latest price is also the lowest since November 1999, when it was 6.5%, and brought the average price of a middle-segment house to about 974,000 rand in April this year.

In real terms, house prices in the middle segment of the market dropped by 2.5% y/y in March 2008, compared with a decline of 0.9% y/y recorded in February, based on headline CPI inflation.

"This was the biggest negative real year-on-year growth rate recorded in house prices since May 1997, when it was at a level of 3.4% y/y, based on nominal price growth of 5.7% y/y, and a headline CPI inflation rate of 9.5% at the time," noted the researchers.

On a month-on-month (m/m) basis, nominal house price growth was only 0.2% in April, unchanged from March. In real terms, house prices dropped by 1.3% in March from February. The real price of a middle-segment house has dropped by a total of 19,700 rand, or 3%, from an all-time high of around 651,500 rand (at constant 2000 prices) in August last year to about 631,800 rand in March this year.

"Sharply rising CPIX inflation, currently at 10.1% y/y and mainly driven by international oil prices, rand exchange rate and food price trends, the 450 basis points worth of interest rate hikes since mid-2006 on the back of inflationary pressures, a significant slowdown in growth in real household disposable income in 2007 and the full implementation of the National Credit Act in mid-2007, are factors having a negative effect on the affordability of housing," said the researchers.

They said these trends have caused the focus of homebuyers to have shifted from luxury, large and expensive properties to smaller and more affordable properties in recent times.

"As a result of these developments, the downward trend in year-on-year house price growth has accelerated since September last year. With inflation still under strong upward pressure, inflation expectations will remain high over the short term, which will have a significant influence on demands for higher wages this year," they say.

Against this background, the Reserve Bank’s Monetary Policy Committee is expected to hike interest rates by another 50 basis points at the June meeting.

In view of these developments and expectations, house price growth is forecast to slow down even further in the rest of 2008 from current levels, says Absa.

Nominal price growth of well below 10% is projected for the full year, with real price growth expected to be in negative territory, which will be the first annual drop in real prices since 1999, when it was -0,3%.

Article from: www.sundaytimes.co.za