House prices continue to rise

House prices increased by a record 27.7 percent year-on-year in August 2004 from a revised record 26.8 percent (26.1 percent) year-on-year in July 2004, according to Absa's monthly house price index released on Monday.

This means that house prices have more than doubled since June 2000, while consumer inflation has risen by less than 25 percent over the same period. The year-on-year growth in house prices during the first eight months of 2004 has averaged 25.1 percent.

This was the fifth consecutive month that house prices have risen by 25 percent or more year-on-year and the ninth consecutive month that house prices have risen by more than 20 percent year-on-year.

Absa said that against the backdrop of strong price rises in the local residential property market, fears of a price bubble persisted. However, the bank noted, recent long-term analyses of indicators such as the ratio of house prices to remuneration, the level of real house prices and the price difference between new and existing houses in South Africa had indicated that these variables were not currently at historical highs.

Factors supporting the market

In addition, it pointed out, there were many other factors currently supporting the property market, which included: personal tax relief; lower transfer duties on property; strong growth in the real disposable income of households; a relatively low ratio of household debt to disposable income; the improved investment status of property compared with that of other asset classes; relatively low inflation and interest rates; and strong domestic and foreign demand, amongst others.

"In view of these factors, the residential property market is still regarded as being in an extended boom phase, rather than experiencing bubble conditions," Absa said.

"Furthermore, interest rates are not expected to increase sharply during the next three years. The rand exchange rate is projected to depreciate gradually over the period, which will contribute to CPIX inflation remaining within the inflation target range of three percent to six percent."

These developments would support a policy of relatively stable interest rates during this period, the bank said, while also supporting the housing market in the rest of 2004 and 2005. In nominal terms, house prices were expected to increase by no less than 25 percent (22.5 percent real) on average in 2004 and another 15 percent (9.5 percent real) in 2005.

The monthly index is based on the total purchase price of houses including swimming pools and other improvements for houses valued at less than R1.6-million and measuring between 80 square metres and 400 square metres and has been compiled back to January 1999. The previous record quarterly year-on-year increase was in the second quarter 1981 with a 23 percent rise.

In real terms, Absa said year-on-year growth of 24.9 percent was recorded in July compared with a revised 24.4 percent in June. The real growth in house prices is based on the most recent headline consumer price inflation figures, which measured 1.6 percent year-on-year in July.

The average real year-on-year growth during the January to July 2004 period was 23.8 percent, with strong real growth based on a relatively low headline CPI of 0.7 percent on average during the period.

Article By: Lynn Bolin - http://business.iafrica.com