Although house prices in South Africa have risen by more than 30% over the past year, the International Monetary Fund (IMF) staff have said, at this stage, there are no clear indications of a bubble having developed. Available data suggest that real estate prices rose from very low levels and there are significant regional disparities.
In addition, a number of special factors appear to account for the large increase in prices, including increased demand from an emerging black middle class, foreign interest in coastal resort areas, and a switch by small-scale investors from other asset classes to real estate.
On a year-to-date basis to the end of October 2004, house prices have risen by 27,8%, easily out-performing a 12,2% appreciation in equity prices and a 9,3% rise in the All Bond Index.
At present, the banking sector in South Africa, which finances most real estate transactions, appears reasonably well protected against a possible drop in property prices.
This is because the mortgage debt of households has grown significantly less rapidly than the market value of housing: the ratio of household debt to the market value of housing shrank to 42% in 2003 from 58% in 1999.
In addition, South African banks are well capitalised. The average risk- weighted capital-adequacy ratio stood at 12,2% at the end of December 2003. Net non-performing loans (non-performing loans less specific provisions) were only 2,4% of total loans.
This risk assessment is reflected in the share prices of banks with banking sector stocks outperforming the total market index since 2003, as the banks index rose by more than 70% since the start of 2004. – I-Net Bridge