South African residential property prices should grow at between 18% and 25% this year after an increase of 28% last year, Standard Bank economists Elna Moolman and Matthew Cook told a media briefing on Wednesday at the launch of the quarterly Residential Property Gauge.
“Concerns about a housing price bubble are exaggerated, and house-price growth continues to be supported by healthy consumer fundamentals and a benign economic outlook,” Moolman said.
She backed up this prognosis with the fact that despite a rise since the end of 2002, South Africa’s household-debt-to-income ratio is still not very high, which suggests that households have further scope to increase their exposure to the housing market.
This is echoed by indices of housing affordability, which are still low relative to historical values.
Affordability indices and the ratio of household debt to income are indicative of healthy consumer fundamentals, which continue to support residential property prices. Low interest rates and accelerated economic growth provide further impetus to the property market.
Economic fundamentals support continued growth in the property market, albeit at a slower rate than in recent months.
Clearly, households’ debt should remain quite affordable, not only under the expectation of no monetary tightening, which is Standard Bank’s most likely scenario, but even if the ratio of household debt to income rises to its historical maximum (62%), while interest rates are hiked by, say, 200 basis points.
In both cases, the affordability of debt is also better than it was when the number of insolvencies peaked (for example, in 1992 and 1999).
This means that households are able to take on even more debt and afford even more expensive houses, which bodes well for the outlook of the residential property market.
The outlook for the property market is also supported by consumers’ increasing optimism regarding economic prospects.
Consumer confidence is well above its long-term and 10-year averages and, despite some volatility, continues its secular rise.
Consumers are positive about their financial positions as well as the economy in general for the year ahead, and their expectations for their finances have increased across all income groups, although higher-income groups are still relatively more optimistic than lower-income groups.
Consumers’ confidence in the economy and their finances weigh significantly on their decisions to spend, particularly on more durable goods and investments.
Consumers are more likely to buy houses, for example, when they are more confident about the economic outlook. Therefore, the broad-based rise in consumer confidence should provide support for houses in most price categories.
The risks to this outlook largely stem from global forces, notably food and oil prices, which are characteristically volatile.
The rand exchange rate, arguably, remains the single biggest risk in the inflation forecast.
Although relative rand strength is generally expected to continue, as the very liquid currency of a small and open economy, it is exposed to capricious global forces and will therefore remain one of the key risks to inflation prospects. — I-Net Bridge