Weekend Argus (Saturday Edition)
House price growth to be below inflation
Experts put blame on current high prices and consumers being under ‘unrelenting stress’
THE SOUTH African property market is in for some turbulent times as a struggling economy and low growth prospects put increasing pressure on owners.
As it is, house prices in South Africa are still high in real terms, with some areas in Cape Town seeing price increases of almost 30% in one year.
Speaking at the Rode-REIM real estate conference, Erwin Rode of Rode & Associates says these high prices will be one of the reasons the country’s house price growth over the next five years will be below inflation.
Other reasons include consumers being under “unrelenting stress” and the banks having increased risk aversion.
“Thus, prices will revert to the mean in the medium term.”
However, Rode, who will speak at the Independent HOME Property Summit and Expo later this month (see overleaf), says there is arguably still a lot of pent-up demand in the affordable housing segment. He warns, though, that what politicians call “unsatisfied demand” is not effective demand in the economic sense but latent demand.
“This should, more correctly, be called a ‘social need’ rather than a demand. Effective demand is demand the consumer can afford.”
He says the value of property is, in the long run, determined by rising building costs, less ageing, with prices oscillating around this long-term trend.
To illustrate this principle, he asks: “Why would one buy a house at, for example, R200, if they can build one for R100?”
“At present, prices are way above the long- term trend- line, which means there is great potential for prices to decline, also known as ‘reverting to the mean’.”
Citing FNB data, Rode says a number of Cape Town suburbs have seen hefty price increases from the second quarter of 2016 to the same time this year. These increases include: Elsies River, Blue Downs, Mitchells Plain, Eerste River 13.7%. Bellville, Parow and surrounds 8.3%. Blouberg, Milnerton, Melk- bosstrand 14%.
Durbanville, Brackenfell 6.8%.
Somerset West, Strand, Gordons Bay 12.8%. Southern Peninsula 12.1%. City Bowl 21.1%. Kraaifontein, Atlantic seaboard 29.9%. City near- eastern suburbs 13.5%. Southern suburbs 14.7%. Cape Flats 12.5%. On average, in the city of Cape Town, house price increases have grown 13.8% over the past year.
Nationally, Rode says the growth rate has been “pretty constant” over the past few years at about 5.6%.
According to the latest FNB House Price Index, there was a mild acceleration in year-on-year growth compared with revised July growth. However, at 4% year-on year, FNB’s John Loos says the rate of increase remains in lower single-digit territory as has been expected throughout the year.
This is a mild acceleration from the revised 3.5% for July.
Loos says the average price of homes bought and sold in August was slightly over R1.1 million.
“House price growth on a monthon-month seasonally adjusted basis – a better momentum indicator than the year-on-year calculation – has suggested we have recently had a period of greater economic weakness, with the month-on-month seasonally adjusted house price growth rate slowing from a 0.82% high in March to 0.32% in July.
“In August, however, there was a slight increase to 0.35%. An accelerating trend in month-on-month growth can often mean a slightly better period for the economy emerging, although we would not conclude this from only a one month acceleration to date.”
Loos says a mild lift in average house price inflation is expected in both 2018 and 2019, with predications of 4.7% and 5.2% respectively.
The FNB macroeconomic forecasts underpinning this house price forecast project a mild acceleration in real economic growth in 2018 to 0.9%, from an expected 0.5% for 2017, and a further rise to 1.3% in 2019. This small growth acceleration in 2018 is expected to be driven by some strengthening in the global economy’s growth rates, says Loos.
“On top of this, we have had one 25 basis point interest rate cut in 2017 to date, and expect a further 25 basis point cut before 2017 is out. This could provide some further mild stimulus to housing demand heading towards 2018.”
However, despite an expectation of a small nominal house price growth acceleration, he says these forecasts translate into ongoing decline in average house prices in real terms, when the house price index is deflated using the CPI.
“We believe it is realistic to expect an ongoing real house price correction through the forecast period, because the small economic growth improvement to 1.3% by 2019 would still be a very weak growth outcome.”