Given the expectation of sharply declining inflation in 2003, real house prices are expected to rise for the fourth consecutive year this year.
According to the latest Economic Perspective published by banking group Absa, an increase in house prices of more than 18% nominal and 10% real is forecast for this year.
The residential property market continued its strong performance in the second half of 2003. According to senior Absa economist Jacques du Toit, house prices rose by 19% year-on- year (y/y) to about R418 300 rand for the average house during the past quarter, after recording an increase of 16% in the first quarter.
In real terms, house prices rose by 10,3% y/y in the second quarter, taking into account an average consumer price inflation rate of 7,9% during this period.
This is the highest nominal and real price increase since the fourth quarter of 2000. In the first half of 2003, house prices had already risen by 17,5% in nominal terms (7,5% real) compared with the same period last year.
“Although various factors that supported the housing market in 2002 remain present, the expectation of lower interest rates during the course of 2003 is probably one of the main reasons for the price performance of the past six months,” says Du Toit.
On average, house prices in all the provinces rose relatively strongly in the second quarter of 2003, compared with a year ago. Nonetheless, the price increases in some regions were markedly lower than in others.
In regions such as KwaZulu-Natal (36.7% y/y), the Eastern Cape (25,2%) and the Free State (20,9%), house prices performed considerably better compared with the second quarter of last year and price rises were higher than those for the country as a whole, which recorded an average increase of 19% y/y.
In some of these regions, a serious supply shortage has been experienced in the recent past, contributing to the particularly good performance of house prices.
In the second quarter of 2003, the average increase in the cost of building a new house was 17,4% compared with a year ago. This is the biggest increase in building costs since the second quarter of 1993, when an increase of 17,9% was recorded.
“The faster increase in building costs since late last year is probably related to the increase in the inflation rate experienced during the course of 2002, as well as supply and demand conditions,” Du Toit says.
In view of this, the average price of a new house amounted to about R573 800 in the second quarter of 2003. This is nominally 22,8% and in real terms 13,8% higher than in the corresponding quarter of last year.
The average price of an existing house was about R399 500 in the second quarter of this year (nominal 18,8% and real 10,1% higher compared with the same quarter last year). This made it about R174 300, or 30,4%, cheaper to buy an existing house than to build a new one.
Looking ahead, Du Toit says that CPIX inflation had already reached its upper turning point late last year and has since shown a declining trend. An average CPIX inflation rate of 4,3% is forecast for the fourth quarter of this year, which is comfortably within the inflation target range of 3% to 6%.
The high basis of calculation established in 2002, when the CPIX rose sharply, as well as the relative strength of the rand since the beginning of 2003, will, he believes, make a major contribution to the significantly lower inflation rate anticipated for the rest of the year.
“In view of these expectations, and with the primary focus of domestic monetary policy on inflation, interest rates, including the mortgage rate, are expected to be lowered by a further 300 basis points during the second half of 2003.
“Against this background, as well as the good performance of house prices in the first half of the year, the housing market is expected to perform relatively well in 2003. An increase in house prices of more than 18% nominal and 10% real is forecast for this year. Given the expectation of sharply declining inflation in 2003, real house prices are expected to rise for the fourth consecutive year this year,” Du Toit states. — I-Net Bridge