Nominal house growth was 21,9% in 2005, but the rate of growth should slow down to between 10% and 12% in 2006, mainly driven by the combined effect of the affordability of housing and interest rates remaining low over the next 12 months, according to banking group Absa.
The bank says investors that are only now entering the property market may well be faced with little prospects of capital appreciation, while rental yields are already fairly low. However, properties that were obtained some time ago may still render an acceptable return during the next 12 months.
“With CPIX inflation currently well under control and a much stronger rand exchange rate since late last year, interest rates are forecast to remain at current levels throughout 2006,” it adds.
The bank also warns that the buy-to-let market appears to be saturated in certain areas.
“Especially residential properties in the upper end of the market (say above R2-million) appear to be more difficult and are taking longer to either rent or sell.”
According to Absa, for various reasons, such as political uncertainty and a poorly performing economy, property as an asset class generally underperformed in South Africa during the mid-1980s up to the late 1990s. However, by 2000/01 most other asset classes were underperforming, while South African property was recognised as relatively cheap at the time.
This caused investors to take a closer look at property as an asset class, with the result that the investment status of property has improved substantially over the past few years.
“Factors such as a stable political environment, a strongly growing economy, low inflation and low interest rates between 2000 and 2005 were some of the main contributors to property becoming a solidly performing asset class during this period.
“Phenomenal real rates of return on especially residential properties during the past four years or so proved unsustainable and during the course of 2005 nominal price growth declined from about 31% in January last year to 14,7% in December. Albeit lower than the 32,2% of 2004, the average nominal price growth for the full 2005 came to a very acceptable 21,9% (about 18% in real terms),” it states.
But it adds that with housing in general having become much more expensive than a few years ago, the issue of affordability is now an important factor in all segments of the residential market. — I-Net Bridge