Property prices out of kilter with economy – but falling in line

The economy may have entered into a technical recession, interest rates are rising and unemployment is at its highest since 2008 – but prices in the residential property market continue to grow.

The FNB House Price Index shows by the end of July 2014 the average house price had risen 7.2% year-on-year, and the average price of a home that month clocked in at R959 394.

“The solid performance of the housing market continues with still positive house price growth in real terms, and an improved balance between demand and supply,” FNB said in a release on the housing data.

However, the bank noted the pace of growth had slowed in recent months. The FNB index showed house price growth has slowed each month since an 8.6% year-on-year inflation rate was recorded in January this year. July’s growth represents a 0.3 percentage point slowing in growth since June’s revised house price grew 7.5%.

While the available residential market indicators still point to a well-balanced market, the slowing growth since the beginning of the year could be a result of two factors, FNB said: Economic contraction, which has exerted pressure on employment and disposable income growth, as well as the 75 basis points’ worth of interest rate hikes since the beginning of 2014 by the Reserve Bank.

First-timers are thinking twice
John Loos, household and property sector strategist at FNB home loans, said such a slow in growth could be attributable to would-be first-time buyers who have decided to hold off on their first purchase.

“What you typically find when times get a bit tougher your aspirant buyers, first-time buyers, would hold off. They are usually young people and they can just rent, or stay in a digs, or stay with mom and dad for a while longer. They a bit more flexible than an established family,” Loos said. “In 2008 we found a lower rate of first time buyers, they are credit dependent bunch … [and] more sensitive to interest rates than older repeat buyers.”

Having said that, FNB data shows first-time buyer levels remain strong and are back up to those last seen a decade ago – and particularly high in Gauteng, where estate agents estimated that up to 35% of buyers are doing so for the first time, compared with the national average of 28%.

Areas formerly classified as “black township areas” under apartheid outperformed the former white “suburbs” in terms of house price growth in the second quarter of 2014, but have also started to show hints at slowing house price growth, FNB said.

This is because more affordable areas are strongly driven by new entrants to the market and are highly credit dependant.

There’s still growth, but it is slowing
According to Absa’s latest housing price data affordable homes (of 40 square metres and priced up to 545 000) increase 3.1% nominally to R357 7000. It had risen 4.2% in the fourth quarter of 2013. The middle-segment housing (homes of 40 square metres to 400 square metres and priced up to R4-million or less) the average nominal price increased 8.5% to R1.2-million in the first quarter of the year – marking slower growth than that of 8.8% in the quarter prior.

Asking prices are also not dropping as much as they did before. FNB data shows the average drop in asking price – in order for the seller to make the sale was -8% – a smaller drop than seen in years when compared with drops of 11% and even 13% in 2010 (when this data was first collected) and 2012 respectively.

“We need to build up more of record in order to see how bad the drop gets in the bad times,” said Loos. “Is 8% a big drop or not? I would have liked to have seen what it was in 2008.”

Loos said the average time a property is on the market however says a lot about price realism and two months or below indicates we have a really strong market. “We are under three months [11.6 weeks] so it’s a good sign of price realism and of balance in the market, where demand and supply are matched,” Loos said.

Slowing growth in property prices is a welcome development, FNB said in its release: “The market has regained its health, but any move towards a so-called ‘boom’ could ultimately prove problematic, as it would be totally out of line with South Africa’s very weak economic fundamentals.”

Nominal expectations
The banks said it expected further gradual slowing in house price growth, moving back in line with the weak economic fundamentals, and expected the Prime Rate (currently at 9.25) to rise further to 9.5% by the end of 2014, and then to 10.25% by the end of 2015. 

Standard Bank’s latest House Price Index rose 7.3% (year-on-year) in June from 6.7% in May but the bank said the pace of deleveraging was disappointing. “Households have never been this indebted at the beginning of a rate hiking cycle. Household indebtedness is trending sideways, at 74.6% in the fourth quarter of 2013 and 74.5% in the first quarter of 2014.”

This, along with moderating economic growth and rising interest rates, would likely likely suppress house price growth, said Standard Bank, which forecast house price growth for 2014 to be below the 7% average of 2013.

FNB’s forecast for house price growth is a 7.3% average growth rate for 2014, the annual average being boosted by the above-8% house price inflation early in 2014, tapering to an average rate of 5.7% in 2015. Absa, too, forecast a single-digit nominal house price growth for 2014 and 2015.

Subscribe to the M&G

These are unprecedented times, and the role of media to tell and record the story of South Africa as it develops is more important than ever.

The Mail & Guardian is a proud news publisher with roots stretching back 35 years, and we’ve survived right from day one thanks to the support of readers who value fiercely independent journalism that is beholden to no-one. To help us continue for another 35 future years with the same proud values, please consider taking out a subscription.

Related stories


press releases

Loading latest Press Releases…

The best local and international journalism

handpicked and in your inbox every weekday