Views on where housing prices are headed are mixed — but economic growth and the RDP hold the key, reports Reg
House prices are still set to show real gains this year, according to property economist Erwin Rode. He is still forecasting a 15 percent average increase this year.
This is despite what Absa Bank’s economists described in the bank’s Quarterly Housing Review as a disappointing housing market performance in the first quarter. Absa’s statistics show a 0,1 percent decline, when adjusted for inflation, in the average price of medium-sized houses in the first quarter of this year compared to the first quarter of 1994.
Rode says not too much importance should be attached to one quarter’s movement, especially when the figures are smoothed, as Absa’s are.
Absa’s Housing Review ascribes the poor performance of house prices mainly to the upward trend in mortgage rates since September 1994.
The mortgage rate is now 17,25 percent, and economists expect at least one or two percentage point interest rate rises this year, taking the rate to 18,25 or 19,25 percent.
Rode reckons the correlation between interest rates and the property market is poor. “We have done many rigorous studies and the link between interest rates and house prices is exceedingly weak.”
Crucially, not interest rates but economic growth is the key to the performance of house prices. “Consensus is we will see three percent growth this year,” says Rode. “In South Africa’s book that is pretty good.”
Rode’s latest survey of the housing market only covers up to the third quarter of last year. In that quarter house prices of all classes had on average increased by a real 6,8 percent in Johannesburg, 7,5 percent in Durban and 11,1 percent in Cape Town.
Absa economist Jacques du Toit notes that interest rate rises are one factor among many which may influence house prices. Others are cuts in personal disposable income due to the rise in the marginal tax rate to 45 percent announced in the Budget, and a higher inflation level, of around 11 percent this year. All this means less money for bonds, and may mean home owners buy down into smaller properties, or that new home buyers opt for smaller and cheaper properties.
Property economist Neville Berkowitz, who does not specialise in the residential market, says the post- election euphoria lasted until about February. “Even I was tempted to forecast price rises of 15 to 20 percent. But it seems to have stabilised into a more regular market.”
Estate agents reported that May was a quiet month, with sellers thinking prices were surging and buyers sure they
“There had to be a correction,” says Berkowitz, who adds that he is talking about what is effectively the luxury end of the housing market now. South Africa is still waiting for the real market to arrive, that of houses selling for under R65 000. “If the market moves it will be at that
Du Toit reckons that a boom in low-cost housing will push up building costs, and the price of new houses, in turn shoring up the prices of existing houses.
Rode comments: “Amazingly enough, home building costs seem to be holding to reasonable levels.” The building cost index for middle-class housing last year showed greater fluctuations than the index for low-cost housing. This plummeted to five percent in mid-1994 before rising again by the end of the year. By contrast, growth in the low-cost housing index remained stable at around 10 percent for most of 1994.
“This stability in the low-cost housing index reflects the lack of progress in the mass housing drive, and once the programme takes off, the index will spiral.”
However, the government’s housing initiative still has to deliver a significant number of brick and mortar houses. One year after the election few actual houses appear to have been put up.
For now private sector townhouse development has far outstripped any expectations of a low-cost housing boost. Rode reports rampant growth in townhouse starts compared to house starts — though townhouses represent a much smaller total area. House starts in 1994, for instance, represented between two and three times the total area of townhouse