Sustained growth expected
Residential property is the closest thing to a sure bet
STORIES ABOUND OF HUNGRY property buyers, both local and foreign, snapping up existing properties for seemingly ridiculously overvalued prices, only to completely revamp the property. One recent example saw an unnamed buyer acquire a home for more than R6m on the up-market Steenberg Estate in Tokai, near Cape Town, only to knock it down and start again, from scratch.
And while that house is still being built, coastal property sales on the West Coast, in Cape Town and along the Garden Route seem to be making nonsense of a cooling property market.
Indeed, Real Estate agents delight in telling the market how many big deals they’ve concluded in top valued destinations such as Knysna, the Atlantic Seaboard, Camps Bay and the V&A Waterfront, to name a few.
But are they talking up the market or is there some sort of frenetic feeding frenzy that mere mortals can’t hope to capitalise on? The clear conclusion is that quality sites are still being snapped up, particularly by wealthy locals and foreign buyers.
These big-name sales also tell a story. The wealthy are still investing in SA property, and if you’re looking for long-term capital appreciation and wealth preservation, your home is still your best friend. So while average real house prices are forecast to grow by a relatively sedate 9,1% this year, compared to 15,2% in 2005, an investment in residential property should be looked at as a long-term bet.
John Loos, property strategist at FNB, believes that SA is poised for sustained growth in property prices, in tandem with long-term economic growth aligned with building capacity constraints
Constraints that would be made all the more acute in the coming years in view of infrastructural development and the building of stadiums ahead of the 2010 FIFA Soccer World Cup.
Loos says that the building and construction sector – accustomed to economic growth of less than 2% – isn’t geared for faster growth, and he believes opinion that spiralling building cost inflation will be a firm catalyst for driving up property prices in the medium to long term, positioning
property for a major recovery in 2008 – as by then interest rates will again be decreasing to below last year’s prime rate low of 10,5%. “Additional growth could also be underpinned by residential spending among the emerging black middle class, that’s moving into higher income categories and spending more on property.”
Even before the benefits of increased spending kick in, the market isn’t looking all that lacklustre.
According to the latest Absa House Price Index, mid-tier category housing was still showing growth in transaction volumes during the first two months of the year, with nominal house prices growing 15,4% yearon-year. This brought the average price of a house in this segment of the market to about R891 700 by the end of February.
Factoring in inflation, year-on-year growth amounted to closer to 8,9%, based on the headline consumer price index, while on a month-on-month basis, nominal price growth was again slightly down at 1,1% in February after growth of 1,4% was recorded in January.
Jacques du Toit, senior economist at Absa, says prices only increased by a mar- ginal 0,5% in real terms in January (1,1% month-on-month in December), as inflation data released for January showed an increase in the CPIX to 5,3%, from a more sedate 5% for the October to December period.
Du Toit believes inflationary pressures, brought about by the higher oil price, a weaker exchange rate and drought conditions, would serve to push up inflationary pressures in the short term.
This, combined with continued high levels of domestic credit extension and a ballooning trade deficit of last year, could motivate an increase in interest rates in April, which would see houseprice growth levelling off again later this year.
The Absa House Price Index is based on the total purchase price of houses in the 80sq m – 400sq m size category, valued at R2,7 m or less in 2006 (including improvements), in respect of which loan applications were approved by Absa.
Prices are smoothed in an attempt to exclude the distorting effect of seasonal factors and outliers in the data.
Elna Moolman, an economist at Stand- ard Bank, says while rate hikes would serve to moderate price growth, the prognosis was still for overall health.
“Over the medium term, continued growth in nominal income will eventually overcome the constraints on household finances so that the medium-term outlook for the housing market is more favourable.”
So keep punting residential property. It’s the closest thing to a sure bet you’ll ever get.
The building and construction sector isn’t geared for faster growth. John Loos