South Africa: House Prices Rocked By Biggest Fall in 15 Years

THE failing South African residential property market was hit by more bad news yesterday, with new figures showing real house prices took their biggest plunge in 15 years in May.

With no quick end in sight to rocketing inflation and interest rates that have knocked the economy, struggling homeowners can expect things to get worse before they get better.

Another 50 basis-point interest rate hike is on the cards at next month's Reserve Bank monetary policy committee meeting, and there may be yet more hikes before the year ends.

According to the latest Absa house price index, real house prices in the middle segment of the market dropped 6,3% year on year in May, the largest drop since real house prices dropped 7,4% year on year in April 1993.

Real house prices strip out the effect of inflation -- which is significant as this stands at about 11% now.

Absa senior economist Jacques du Toit said real house prices dropped 4,8% year on year in April.

Nevertheless, the 6,3% drop is nowhere near the huge plunge of 22% year on year recorded in June 1985.

Du Toit said nominal year on year house price growth was 3,8% last month, down from a revised 4,7% in May.

"High interest rates and inflation are driving the drop in (real) prices to a large extent because they put pressure on household finances. Therefore affordability of housing comes under further pressure," he said.

Apart from the expected interest rate hike next month, Absa did not expect any further interest rate increases.

But Du Toit said he was expecting further real price declines until the end of the year.

He said he expected a real house price drop of 6% for the full year and nominal growth of about 5% for the same period.

Property economist Erwin Rode of Rode & Associates said the worst was still to come.

"This downward trend in house prices will continue for at least another year before stabilising. Our best estimate is that by the middle of next year, prices will be typically about 10% below the levels of December 2007," he said .

Kay Geldenhuys, head of property finance processing at bond originator ooba, formerly MortgageSA, said that since May the group had been recording a "downward trend in our average bond size".

"This is linked to the fact that purchase prices are dropping," said Geldenhuys.

She said they found that, among first time home buyers in particular, the average purchase price being targeted was "4% down".

According to ooba's data, the average purchase price for all home buyers had dropped 2% year on year.

"What is significant is that the average home acquired by a first time home buyer is down 5% year on year," said Geldenhuys.

Andrew Golding, CE of Pam Golding Properties, said residential transaction volumes were down as much as 30% compared with the same time last year.

"The nominal growth in house prices has slowed to below inflation. In other words, house price growth is at best flat. Whether this is going to be the signal for buyers to start to get into the market remains to be seen, but we are seeing buyers making use of the opportunities to get into the market," said Golding.

He said there was also a greater percentage of homeowners needing to sell their homes because of financial difficulties than the real estate market was used to in the recent past.

Realty 1 International Group CEO Mike Bester said recently that the time was opportune for buyers with spare cash to invest in the buy-to-let property market.

"If you are thinking of investing in residential property, it's probably a good idea to do it now rather than later. The rental market is booming as a result of diminishing affordability of mortgage payments, especially in the lower-income brackets, and because of the glut of stock on the market."

This, plus the desperation of some homeowners to sell, meant there were bargains to be found, said Bester.

Absa said that in real terms, house prices dropped 1,1% in May from April, which was the sixth consecutive month of a real price decline.

The bank said the May real price decline was in "sharp contrast" to a positive real growth rate of 33,9% year on year recorded in September 2004.

Article by: Nick Wilson -