Real Estate News - House prices off the boil

Homeowners can take heart because house prices are still growing way above the 4,2% inflation rate but the pace of increase has softened from last year’s peak of 32%.

This was confirmed yesterday by the house price indices of two major banks – Absa and Standard Bank. The Absa House Price Index showed that house prices on average rose by 14,7% in November, from 16,2% in October.

Jacques du Toit, Absa’s property economist, says this is the lowest year-on-year growth
since mid-2002 and brought the average house price in the middle segment of the market (R2,2m or less) to about R727 700 in November.

This contrasts with Standard Bank’s property index’s 21% growth in the second quarter, from 24% in the first quarter and FNB’s 20%.

Elna Moolman, author of the Standard Bank report, says the deceleration in house prices is most evident in the upper range, while activity and values of properties in the middle range are still outpacing the growth in other bands.

“Faster growth has been recorded in the middle price ranges than among the most expensive houses,” notes Moolman.

“Rising property prices have stimulated demand for more affordable property and townhouses and flats have gained in popularity relative to houses.”

According to Statistics South Africa, the number of houses completed this year was almost 20% lower than in the corresponding period in 2004, while the number of townhouses and flats completed has grown by 68% in the year to date.

Moolman says this reflects a rising supply of townhouses and flats. Continuous price growth in this segment implies that the demand for this type of accommodation still exceeds supply.

FNB’s quarterly report has revealed that it is taking about two months for 70% of properties to be sold and 48% of sellers are not realising their asking prices.

Ed Grondel, CEO of FNB Homeloans, said these changes in the market are partly because of the tendency of sellers to hold out for unrealistic prices and buyers are no longer at the mercy of seller’s “idealistic prices”.

Anton de Leeuw, CEO of YDL Property Wealth Education, says sanity has prevailed. “Another 30% plus growth would have pushed the market into bubble territory. The slowdown is good for the market as it brings stability,” he argues.

De Leeuw cautions that Investors are faced with the prospect of declining capital growth. “Some will sell and invest their money where they expect higher returns,” says De Leeuw. “Fewer investors are expected to enter the market and we should see a further slowdown in speculative activity.”

“My advice to investors would be to see property as a long-term, steady investment comprising the conservative end of a balanced portfolio”, says De Leeuw, adding that investors who bought wisely should hold on to property if they can.

Moolman says a slowdown in property price growth will dampen other types of consumer spending and hence economic growth by reducing the wealth effect seen during the boom.

“In 2004, for example, households withdrew about R50bn from their mortgage equity on the back of higher house prices,” she discloses. (This is equivalent to about 6% of the value of total household consumption expenditure in 2004.)

“House price growth is expected to halve in 2006 from 2005. A significant stimulus to households’ spending will therefore be withdrawn.

Du Toit argues that lower house price growth is expected to continue into 2006, but the slowing downward trend in month-on-month growth suggests price growth will bottom out at some stage and start a gradual upward trend in the second half of 2006.

Article by: Chris Nthite - www.moneyweb.co.za