FNB’s House Price Index has shown a remarkable recovery with house prices increasing by 8,6% compared with a year ago — well above inflation. This is the first time that house prices have increased in real terms (net of inflation) since early 2008. This goes against predictions that house prices would remain flat in real terms.
FNB property economist John Loos says this recovery is not only due to rate cuts since 2008 but is supported by a recovery in economic growth.
The downside is that home ownership will now become less affordable. While house prices were falling and people were seeing above-inflation wage increases, the affordability of housing relative to income started to increase in 2008. However, Loos says that this trend appears now to have come to an end with above-inflation increases in house prices.
The recent interest-rate cut of 50 basis points will not be enough to offset the increase in house prices, which will start to have an impact on affordability in terms of the monthly mortgage repayments, especially as further rate cuts are unlikely. New entrants to the housing market will find affordability becoming an increasing problem over the next year. But we do need to put this in context. Affordability is currently at levels last seen in 2004 before the strong rally in house prices. So buying a home, relative to one’s income, is not as burdensome as it was at the peak in 2008.
The FNB House Price Index showed that property prices increased by 8,6% for the year ending March compared with 6,2% in February. The average house price is now R779Â 546. Adjusted for inflation, house prices started to recover in August 2009 and have risen by 10,6% after a decline of 20% (after inflation) between March 2008 and July 2009. Since the start of the index in July 2000, house prices have increased by 197,9%, or 71,6% after the figures are adjusted for inflation.
Going forward, Loos is not overly optimistic and does not expect house prices to sky-rocket as the interest rate stimulus runs out in the second half of this year. Loos believes the increase in house prices will peak in the middle of this year.
Townhouse vs family home
FNB figures show that demand for family homes held up better during the property downturn than sectional titles. Loos believes that this is due to the buy-to-let market, which resulted in an oversupply of sectional-title properties.
“The freehold market, by comparison, has a greater proportion of three-bedroom ‘family properties’, whose demand is more stable, not setting the world alight as much in boom times, but remaining more solid in the downturns,” says Loos. He also adds that the high cost of building makes existing homes more attractive for home owners. The average cost of rebuilding an existing freehold property is still estimated at 20% higher than the average price of an existing freehold property.
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