Sus­tained growth ex­pected

Res­i­den­tial prop­erty is the clos­est thing to a sure bet

Finweek English Edition - - Creation and preservation of wealth -

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

ABSA HOUSE PRICE IN­DEX

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