Emerging Black middle-class powers house prices
Riding on the back of an empowered black middle class, house prices have been rising strongly for the past six years in South Africa (pop. 45.3 million, GDP/cap US$5,400).
The double digit growth rate of house prices in the middle segment continued in 2005 with a nominal house price growth of 21.9%, lower than 2004s growth of 32.2%. However, the luxury residential segment continues to perform poorly compared to other segments and prices have started to fall.
The Cape region at the south-western tip of Africa is the safest place for an investment in property. There is still a strong influx of buyers from the Johannesburg area, which keeps prices up. Spectacular sea and mountain scenery, a pleasant year-round Mediterranean climate, coupled with beautiful and vibrant working waterfront, have pushed Cape Town into the fore as a tourist Mecca.
Cape Town, Johannesburg
While Cape Town is more tourist friendly, there is interest in Johannesburg (pop. 3.2 million) as well. Johannesburg is South Africas largest city and the center of manufacturing, financial and economic activities. Although mining is no longer done within its city limits, the headquarters of mining companies are still there.
Johannesburg is also home to Africas largest stock exchange. It also has one of the most expensive property markets in South Africa.
Often mistakenly thought of as the countrys capital, Johannesburg is actually not even one of the three capitals; Pretoria which is quite near is the national and executive capital, Cape Town is the legislative capital and Bloemfontein is the judicial capital.
All segments of the property market have experienced a slowdown in 2006 compared to the previous two years. The average price of middle-segment houses (80-400 sq. m.) in March 2006 is about ZAR7,034 (US$106,950), up by 14.5% from a year earlier. Large middle-segment houses (221 400 sq. m.) experienced the highest rate of y-o-y price growth at 16.2%, to reach an average of ZAR1,049,704 (US$147,715).
Despite the strong growth in those segments, the price of luxury segment house prices (ZAR2.2m 8.2m (US$310,000 1.15 m) have started to fall. The average price for luxury houses dropped by 2.4% from ZAR3,286,468 (US$462,470) in Q1 2005 to ZAR3,206,640 (US$451,240). This confirms that the housing boom is primarily fuelled by strong demand for housing from the middle income population segment.
However, with rapid price appreciation and the influx of investors increasing the supply of rental units, yields have gone down. According to one rental agency administrator, investors should not now expect returns of more than 5%. Preference for ownership has increased tremendously given the rise in purchasing power over the past decade.
Doomsayers believe current house price levels represent a bubble. But in reality prices have merely recovered from the deep undervaluation of the late 1990s, which stemmed from the countrys political instability and the resulting economic uncertainty.
Of course, the catch-up property price increases have given the impression of excessive rises, but from 1997 to 2004, property prices have expanded by an average of 16.3% annually, not enormously more than average nominal GDP growth of 10.5% (inflation has averaged 8% over the last few years).
End of Apartheid
The strong growth of households real disposable income has also been somewhat encouraged by tax reliefs for individuals, in the context of a strongly growing economy. In 2006, the CGT exemption on a primary residence was lifted from ZAR1 million (US$138,554) to ZAR1.5million (US$207,831). Transfer duties on properties have been lowered too. For example, no transfer duty is payable on properties valued at ZAR500,000 (US$69,277) or less.
The second factor is that South Africans who had parked money offshore during the Apartheid era were allowed (and required) to bring it back by September 2004. Much of this money has gone into property.
Stability and security
Low interest rates have given the final push to the market. Although South Africas 11% mortgage rate is high by international standards, it is quite low by historical standards (in 1998 the mortgage rate for new housing loans was 22.75%). With the recent drop in interest rates, 30-year flexible mortgage loans are now commonplace.
Article from: www.globalpropertyguide.com