SA house prices forecast to double in second half of decade
Rodney Hayter

DURBAN (July 18) - Long-term prospects for the residential property remain positive, according to FNB’s property strategist John Loos, who is confident that house prices, having already posted a more than 20 percent cumulative growth since the beginning of 2006, will record a doubling in their values in the second half of this decade.

This is far off the 212 percent increase recorded in the first half of the decade, but still substantial in world terms.

Loos, addressing estate agents at an FNB Home Loans recent legislation workshop in Durban , forecasts a steady annual increase in house prices for the remainder of the decade to reach its highest annualised level of around 20 percent by the end of the decade or early in 2011.

The lowest point of appreciation in his extensive economic overview was for late this year/early-2008, overshadowed by interest rate increases, bottoming at around 10% year-on-year.

Clearly much depends on interest rate movements, but given the current inflation situation he expects little more than one further 50 basis point increase this year, implying that the interest rate cycle is near its peak. Furthermore, after a mild slowdown this year, he expects an economic upturn starting next year. In addition, while interest rates form an integral part of his overview, he emphasised that unlike in the past, today’s property market was far less at risk of interest rate volatility, due to a change in the South African Reserve Bank’s approach to interest rates since the 1990s. In the absence of large interest rate moves, the current market was being primarily driven by relatively strong economic growth, which he believed was on track to record at least a 4,5 percent growth rate in the current year before strengthening next year.

Positive structural changes resulting from democracy and the end of isolation and restrictive laws for many, were largely responsible for increasing long term economic growth momentum, and this is the reason why the current economic slowdown should only be mild.

More rapid long-term economic growth was in turn driving strong demand growth for housing. The solid growth was aiding a steady emergence of a black middle class. Another positive for the residential market was the Reserve Bank’s far more stable interest rate policy. Their strategy of moderation with interest rate adjustments meant that homebuyers were now far less concerned over interest rates volatility associated with the past, which had bolstered their confidence to borrow far more aggressively.

Another long-term positive for the housing market cited by the economist was the current construction boom. This was creating rising pressure on the building costs through creating shortages of both building materials and skills, resulting in an inevitable knock-on effect on the delivery of new houses. The pressure on the supply side was expected by Loos to continue for “some years.”

The delivery of capital projects, which in terms of real government funding were still below 1976 peak levels in spite of the economy having doubled in size since then, would also seriously test the building and construction industries skills and exert further substantial pressure on building materials supply.

Building cost inflation for residential property, which dipped from a peak of 40 percent was now running at about 26 percent and was expected by Loos, apart from some minimal movement, to stay high over the rest of the decade.

A new and significant factor emerging for the first time in the new housing delivery equation and certain, in Loos’ view, to underpin residential price growth was the scarcity of new urban land with the necessary infrastructure. Higher densification was a must but even a higher concentration of housing, similar to that in European urban areas, he suspected would not stop land prices going through the roof.

Land costs in new developments, he forecast, would become a far more significant portion of total house prices (building value being the other component) in the years to come. The affordability of new housing had been muted to some extent over the years by developers reducing the size of stands. These were now about half the size of those of ten years ago for new stock and this trend would continue. Due to future cost of land, the house with swimming pool and tennis court would only be available to the very rich. A larger portion of the future middle class was destined to live more in apartments and small cluster houses than the middle class of the past.

Loos also pointed out that in spite of ongoing middle class growth, the number of residential building completions had tapered off mildly over the past 2 years. Already there are early signs that demand may be catching up with supply once more. Trafalgar’s rental indices have begun to show an upturn in rental inflation, and recent projections by Trafalgar of a doubling of residential rentals within three to five years could mean a revival in the buy-to-let market soon.

The combination of ongoing solid demand growth on the one hand, and supply constraints on the other, in his view, were highly positive for the long-term future house price growth. The possibility of house prices again doubling in the second half of this decade he noted would be viewed with horror by many people, but the grim reality was that South Africa’s house prices were still dirt cheap compared to many other countries.

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