'Soft landing' for market

South Africa's residential property market is not in a bubble but is rather headed for a soft landing, according to Absa (Absa), the country's largest home lending group.

Commenting on the outlook for the local housing market on Wednesday, Absa Group chief economist Christo Luus said the bank believed that, although house price growth had slowed in the past six months measured in year-on-year terms, the market was not headed for a crash.

House price increases were expected to continue to taper off for the rest of 2005 and 2006, but would nevertheless record positive real growth for 2005, the sixth year in a row for real residential property market growth.

According to Luus, the year-on year (y/y) growth in house prices had slowed after average price increases of more than 30 percent were recorded during most of 2004. In the fourth quarter of 2004, nominal house price growth averaged 34.2 percent, mildly lower than in the third quarter, whereas the monthly Absa House Price Index for March 2005 showed its fifth successive month of declining y/y growth, which measured 26.9 percent, down from the peak of 35.4 percent reached in October 2004.

"The current downward trend in house price growth can probably be ascribed to the fact that housing has in general become less affordable, taking into account the high level of house prices and salary and wage increases of well below 10 percent in 2004," he noted.

"Mildly lower interest rates during the past twelve months, which caused household debt servicing costs to increase, also contributed to housing becoming less affordable.

"As a result, buyers appear to start showing some resistance against high asking prices, with indications that the difference between asking and selling prices has increased, while properties remain longer on the market before being sold."

Market not in a bubble
Luus said that although some analysts had expressed concerns that the residential property market was in a bubble, Absa would not regard the market, overall, as being in a bubble.

However, he added, it was important to emphasise that, irrespective of whether or not there was a bubble, a house price crash could always occur should there be a major economic shock.

"Currently, the worst possible economic shock for the housing market is believed to be that of a sharp oil price increase, which could bring about global recessionary conditions, as well as rising domestic inflation and interest rates," Luus observed.

Slower growth expected
"However, Absa's baseline economic forecast for 2005 is one of relative stability in domestic economic growth and interest rates, albeit also one of mildly slowing growth as the year progresses."

Against this background, a soft landing appeared likely for the housing market, with the property boom also having a broadly positive impact on the economy in general. Positive spin-offs were expected in terms of: income distribution; wealth distribution; consumer demand; capital formation; economic growth; the functioning of property markets in "less favoured" areas; and access to credit.

Absa was also of the view that nominal growth in house prices would continue to slow in the rest of 2005 and 2006, the economist stated. Factors such as the rising cost of household debt servicing relative to disposable income and slowing real disposable income growth were impacting on the affordability of housing.

Still, he said, taking into account projections of lower nominal growth (not lower prices) as well as the inflation prospects for 2005, real house price growth for the year was nevertheless expected to be positive, which would be the case for the sixth year in succession.

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