Property market still has upside

HOUSE prices grew 21,9% in 2005, way above the inflation rate, despite the vaunted housing market downturn.

Jacques du Toit, Absa’s senior economist, observes that although house-price growth was on a declining trend during the course of 2005, the average price performance was still strong compared with 2004.

According to the latest Absa House Price Index, nominal house price growth declined from a level of 30,8% year-on-year in January 2005 to 14,7% in December (15,7% in November).

“This brought the average growth in house prices in the middle segment of the market (R2,2m or less) to 21,9% in 2005 (32,2% in 2004),” Du Toit said.

As a result, the average house price came to about R700 200 in 2005 (R574 200 in 2004), with prices averaging R738 900 in December last year, he added.

Mike Spencer, head of the investment club at Platinum Global, says decline in house-price growth from 2004 levels was due to affordability issues.

“Potential buyers were finding it difficult to find properties that they can afford,” says Spencer.

Erwin Rode, CEO of property valuers Rode & Associates, says the declining trend is still intact and month-on-month growth will be zero by the end of the year.

Rode argues that homeowners should take heart because there is still some growth left. He adds that serious sellers should not be greedy because the market is cooling off fast.

Herschel Jawitz, CEO of Jawitz Properties, says the dip is in line with the continuing trend in property prices, which is expected to bottom out at 10 to 12%.

Jawitz also observes that the Australian and UK house markets are flat and the US house prices are slowing down. “So the local slowdown is healthy because it means we are in for a soft landing.”

Anton de Leeuw, CEO of YDL Property Wealth Education, points out that a repetition of the 32,2% average house-price growth in 2004 – the highest in the world – would have firmly pushed the SA market into bubble territory.

“The slowdown has been the right medicine,” argues De Leeuw. He adds that the 21,9% growth in 2005 still reflects very strong growth, especially when compared to international markets.

“The lower projected growth in 2006 will be a steady performance and will put SA on par with many international markets.”

Jawitz argues that the implication for homeowners is that capital growth in their properties is slacking and for potential buyers the gap between salaries and house prices is narrowing.

“The only risk,” says Jawitz, “is in the investment market, because investors are no longer getting the capital growth of the last few years and many may be forced to sell to exit their investments.”

De Leeuw says from an investor perspective, yields will continue to fall. Du Toit adds that the easy money has been made in the rental market. “The huge capital appreciation of the last five years is a thing of the past,” says Du Toit.

Looking ahead, Du Toit notes that with CPIX inflation currently under control and a much stronger rand exchange rate since late last year, interest rates are expected to remain at current levels throughout 2006.

“However,” he warns, “the oil price edged up to above $60/barrel again, which may lead to inflationary pressures if the rand exchange rate depreciates significantly from its current level.”

Against this background, says Du Toit, lower house-price growth of between 10 and 12% is projected in 2006, driven mainly by the combined effect of the affordability of housing and interest rates remaining low over the next twelve months.

  • This story first appeared in Moneyweb Business in the Citizen

Article by: Chris Nthite -