Indications are that the South African residential property market is not generally experiencing bubble conditions yet.
However, it is quite conceivable that certain types of housing in certain areas of the country are experiencing bubble conditions, which might result in the prices of those properties declining when the cycle turns, according to Absa senior economist Jacques du Toit.
In some areas, he points out, the buy-to-let market has been instrumental in driving house prices higher and any saturation of and a massive sell-off in this market could therefore lead to either stagnating or weaker prices.
Taking into account recent trends in international oil prices and the rand exchange rate, Du Toit adds, the Reserve Bank is not expected to cut interest rates further in 2005, mainly as a result of the negative impact these developments could have on inflation.
“A gradual increasing trend in interest rates is projected between mid-2006 and late 2007 in an effort to keep inflation in check. However, if an oil price shock occurs, together with a sharply weaker exchange rate, inflation pressures will increase significantly, leading to the risk of markedly higher interest rates. In the event of such developments, the housing market may experience a significant downward correction in terms of activity and price levels, taking into account current conditions in the market,” Du Toit says.
According to Du Toit, the South African residential property market has over the past five years experienced strong price growth of about 20% per annum in nominal terms and 13,6% per annum in real terms.
“During this period the market was driven by a wide range of factors after many years of mediocre growth from the mid-1980s up to the late 1990s. Property prices have probably been catching up with other asset prices since then. As a result, an important indicator such as the ratio of house prices to the level of remuneration has increased significantly since 2000, but has towards the end of 2004 not yet reached the peak of early 1984. An increase in this indicator implies that house prices are increasing at a faster rate than remuneration.
“The monthly measured rate of year-on-year growth in house prices began to taper off in mid-2004. In the fourth quarter of 2004, nominal growth averaged 34,2%, mildly lower than in the third quarter. In the first and second quarters of 2005, nominal house price growth was respectively 29,2% and 24,8%. The monthly Absa House Price Index for June 2005 showed its eighth successive month of declining year-on-year growth, measuring 23,3%, down from a peak of 35,5% reached in October 2004. This declining trend in house price growth since late last year can most probably be ascribed to fact that housing has in general become less affordable, taking into account the abovementioned trend in the ratio of house prices to remuneration,” Du Toit says. – I-Net Bridge