Even though average South African house prices have risen by more than 30% year-on-year (y/y) in the first nine months of this year, the South African residential property market is considered to be in a strong rising phase, rather than experiencing bubble conditions, according to South African commercial bank Absa.
The South African residential property market has performed particularly strongly in the past few years, with a nominal y/y increase of 17,4% in house prices in 2000, followed by further increases of 14,1% in 2001, 15,1% in 2002, 21,5% in 2003 and 31,6% in the first nine months of 2004.
These strong house price increases since the end of the Nineties have caused increasing concern that South African residential property is currently overvalued and fears that the market is experiencing bubble conditions, as is alleged to be the case in many other countries.
Indicators such as the house-price-to-income ratio, the mortgage-repayment-to-income ratio and the price difference between new and existing houses are still not at the levels reached in the early Eighties, when there was also a strong property-market boom.
Furthermore, a wide range of fundamentals supporting the market can be identified, many of which were absent at that time. Some of these factors will probably continue to support the property market in the near future.
The average price of houses in the 80 square metre to 400 square metre category and priced up to R2,2-million (the previous cut-off point was R1,6-million) rose by 34,5% y/y in the third quarter of 2004. This brought the average price of a house in this category to R594 500 in the third quarter of 2004.
In the third quarter of 2004, the average increase in the cost of building a new house compared with a year ago was 16,5%. This raised the average price of a new house to R681 500 in the past quarter, a nominal 15,2% y/y higher.
The average price of an existing house was about R575 700 in the third quarter of this year, which was up 36% y/y.
The price difference between new and existing houses has been showing a declining trend since the first quarter of 2003, when it reached a record high of 31,5% and is now only 15,5%, as the price of existing houses have escalated faster than the price of new houses.
Absa said that any so-called local residential property market bubble, should it exist, is unlikely to burst spontaneously.
A sharp downward adjustment in property prices is only likely to result if there is a macro-economic shock such as an exchange-rate crisis or a considerably higher international oil price, which would lead to significantly higher inflation and interest rates in the short term.
Such macro-economic shocks are not currently factored into Absa’s baseline projections.
The strong growth in house prices of more than 30% y/y during the past nine months is not expected to continue unabated.
Quarter-on-quarter house price growth has declined since the first quarter of 2004, which set the scene for lower y/y growth in the near future.
With interest rates currently near their bottom turning point, stable rates — and especially higher future rates, combined with still rising house prices — will result in higher mortgage repayments.
This will have a negative effect on the affordability of housing, which will eventually lead to lower growth in house prices, Absa concluded. — I-Net Bridge