House prices rise but property values decline in real terms

The cost of living is rising – and so are house prices. But, in real terms, residential property prices have declined substantially over the past seven years and are set to drop even further.

According to the FNB House Price Index released on Monday, house prices in September were 20.3% lower than December 2007 – “the month in which last decade’s boom-time peak in real house prices was reached”. This figure is arrived at after adjustments for inflation. In nominal terms, house prices in October 2014 were 21.4% higher than December 2007.

The toxic mix of high inflation, high unemployment and low growth means South Africa is experiencing stagflation.

The South African Reserve Bank has attempted to combat stagflation by raising interest rates at a time when consumers are under severe strain.

“Rising interest rates raise the popularity of rentals and decrease the popularity of buying,” said John Loos, household and property strategist at FNB Home Loans. “In an interest rate hike cycle, people may downscale but choose to move into the rental market instead of buying again.”

He said that although rental inflation has been increasing gradually, it is yet to catch up with headline inflation: “It’s not shooting the lights out yet, I would expect it will gradually accelerate further,” Loos said.

The Reserve Bank’s recently released financial stability review noted that Statistics South Africa had reported a marginal annual increase in rentals of 5.2%, up from 5% between January and July 2014.

It is possible that residential property prices could in fact drop further. “If one looks at the Absa House Price Index, which goes back to the 1960s, we are still at historically high, real price levels,” said Loos. “It’s realistic that we may have more rand weakness and more inflationary pressure, and higher interest rates. So it’s likely house prices in real terms will decline to levels below consumer price inflation.”

Repayment burden
The Reserve Bank’s financial stability review said an increase in the cost of home ownership and the repayment burden that accompanies such asset purchases can be ascribed to the increase in interest rates in recent months, “which could place additional stress on already highly leveraged investors in buy-to-rent properties”.

The FNB Estate Agent’s survey for the third quarter of the year found that, after having edged up gradually in previous quarters, the small rising trend in “buy-to-let” buying had stalled.

“As a percentage of total buying, buy-to-let purchases are estimated by survey respondents to have edged down slightly from 10% in the previous quarter to 9% in the third quarter,” the survey said.

“The on-going mediocrity in buy-to-let buying is probably explained by the rental market’s strengthening to date having remained modest, interest rates having started to rise, and tenants having limited means in the currently tough economic environment.”

Loos said: “At the moment the market is strong but I would not say it’s an ideal buy-to-let opportunity.”

The FNB report said that a moderately higher buy-to-let percentage, relative to previous years, coupled with relatively slow sales of rental properties should still contribute to a growing supply of rental stock.

“However, we believe that the current economic and interest rate environment should also support rental demand growth somewhat,” it said.

“Our expectation of further rises in interest rates in 2015, possibly causing some aspirant first-time buyers to postpone their home purchase and rent for longer, as well as for a greater rental demand from a moderately increased number of financially constrained households, could see to it that rental inflation continues to move gradually higher in the near term.”

According to the FNB House Price Index, the average house price for October 2014 was 5.9% higher than the previous year. This is slower than the previous month’s 6.0%, and represents the tenth consecutive month of gradually slowing price inflation since the 8.5% rate recorded in December 2013.

The average price of homes sold in October was R961?760, FNB said.

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