SA house prices surge by 24% in May

South African house prices increased by 24,3% year-on-year in May 2004 from a revised record 24,5% y/y in April 2004. This was the sixth consecutive month that house prices have risen by more than 20% y/y, according to South African commercial bank Absa’s monthly house price index (HPI) released on Thursday.

As South Africa’s largest home loan provider, Absa has up until 2002 released a quarterly survey of house prices based on loan applications to the bank.

The monthly index is based on the total purchase price of houses including swimming pools and other improvements for houses valued at less than R1,5-million and measuring between 80 square metres and 400 square metres and has been compiled back to January 1999. The record quarterly y/y increase was in the second quarter 1981 with a 23% rise.

Absa said the upward trend in house price growth since October last year can largely be ascribed to the lower interest rates since mid-2003. Prior to this episode, the last time that house prices rose by more than 20% y/y was in October and November 2000.

The South African Reserve Bank (SARB) cut interest rates in mid-June for the first time since September 2001. The SARB followed up the June 2003 rate cut with further rate cuts in August, September and October and December for a total of 550 basis points reducing the home loan rate to only 11,5%.

Absa expects interest rates to remain stable for much of the year before rising late in 2004.

The rise in real terms was a record 24,1% y/y in April. The real growth in house prices is based on the most recent headline consumer price inflation figures, which measured 0,2% y/y in April.

Despite the abovementioned strong growth in house prices in the first five months of 2004, growth in both nominal and real terms is expected to slow down this year from current levels. This will result mainly from higher inflation and interest rates towards the end of the year and a continuing rising trend in the ratio of house prices to income.

A further concern amongst homeowners is the possible large increase in property rates in the second half of this year.

“We will have to wait and see how large the increases are before assessing their impact on property prices,” said Absa senior economist Jacques du Toit.

Municipalities will shortly start calculating the property tax on the market value of the property instead of the land values alone. In the Western Cape this is already in common use, but property taxes there are not vastly different from what people in the rest of the country pay now. The property law also stipulates that it will be phased in over a period of three or four years, so the impact in the first year may not be that large.

This is because municipalities are not allowed to increase their income with more than a certain percentage in any one year unless the minister of finance gives them special permission.

Any increases must be inflation related and it would be unconstitutional to exceed and approve this maximum without a very good reason.

Nominal y/y increases have only exceeded 20% y/y eight times so far in the past 41 months for which data is available, while the recent y/y low was 13,4% in December 2001.

Growth in house prices for 2003 came to 19,0% y/y compared with 15,2% y/y in 2002. The average real growth rate for 2003 was 13% compared with 6% in 2002.

Monthly increases have slowed recently as the market came off the boil and were 1,43% in May from 1,95% in April and a record high of 2,56% in both January and February 2004. – I-Net Bridge

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Maya Fisher French
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