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South Africa: House Prices Down 11,3 Percent - Standard
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Business Day (Johannesburg)
2 July 2008
Posted to the web 2 July 2008
Colin Anthony
Johannesburg
MEDIAN house prices fell to R550000 last month, a contraction of 11,3% year on year compared with the median house price of R620000 in June last year, according to the Standard Bank residential property gauge released yesterday.
The residential property market is in a state of deflation, says the bank.
This means homeowners are seeing the value of their properties fall dramatically as they pay 36% more than they did two years ago to pay off mortgages.
However, the bank emphasised the figures were "somewhat distorted" as the fall came off a relatively high base due to a surge in the number and value of home loans granted before the National Credit Act came into effect a year ago.
"In our view there is house price deflation although the numbers exaggerate it because of people pre-empting the act," said Standard Bank property economist Sizwe Nxedlana.
The Standard Bank median house price is considered a reasonably accurate portrayal of national house price trends, given the bank's market share in the mortgage business. Monthly new mortgage loans and readvances granted -- a proxy measure for demand for residential property -- contracted 14,8% year on year in February and 25% in March.
The last time such declines were recorded was between late 1997 and 1999, a period of high interest rates and low growth in property prices, but with inflation at lower levels than today.
Nxedlana said the residential housing market had "not been left unscathed" by the "confluence of factors" eroding the spending power of consumers.
These included higher interest rates, record-high household indebtedness and higher inflation fuelled by the "stickiness of food prices at elevated levels and the adverse effects of higher oil prices on domestic transport inflation".
"The outlook for the residential property market remains bleak. Despite the negative effect of higher interest rates on aggregate demand, the country's inflation dilemma continues to intensify."
Higher electricity costs would increase the "anticipated peak" in the target consumer inflation index (CPIX) and extend the period in which CPIX would be higher than the government's 3%-6% target band.
"In the meantime, higher inflation outcomes have led to higher inflation expectations, which will lead to higher wage demands and probably wage settlements," Nxedlana said.
"Higher wage costs, given the fact that labour is usually the largest input cost in an economy, will pressurise company profitability and incentivise companies to pass prices back to consumers. Clearly this could create an environment of runaway inflation that, if not combated strongly, could take a very long time to correct."
He said the combination of these factors and the need to anchor inflation expectations at low levels to limit the odds of runaway inflation might outweigh the negative effects of higher interest rates.
Standard Bank expected another rise in interest rates in August of 50 basis points, taking the prime rate to 16%.
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This, should it come to pass, "will place further strain on the housing market by further reducing affordability", Nxedlana said.
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