Johannesburg — ABSA Home Loans describes the outlook for house prices as "dismal". FNB says the mild deflation seen so far doesn't yet reflect the full extent of strain in SA's housing market.

It's a bleak picture, in other words, one not expected to improve before late next year or even only in 2010.

And it's a picture that will unnerve many South Africans, accustomed as they had become over five or six years to what seemed to be perpetual increases in the value of their homes.

Based on its book, Absa calculates the rate of increase in house prices slowed to just 1,2% in October. For the full year, it's expected that prices in nominal (money) terms will be up only 3,5%-4%, the slowest since 1996. In real, inflation-adjusted terms, prices are already down sharply, with Absa calculating a real year- on-year decline of just over 10% in September. Rival FNB's estimate is similar, at a negative 9,6% in real terms, while at Standard Bank, the median house price declined even in nominal terms last month, when it fell 2,5%.

But not all segments of the market have been equally hard hit and a worrying, though probably not surprising, trend to emerge from the banks' surveys is that it's in the lower-income market that declines have been steepest: FNB finds that the prices of freehold two bedroom houses have fallen nearly 12% in real terms.

So we are back into house-price deflation - a feature of the South African housing market for much of the two decades until the early years of the new millennium, when sustained low interest and low inflation rates finally brought an era of house price inflation, inflation that began to reach bubble proportions - at least in some parts of the market.

That won't be repeated this year, nor next year, the property economists predict.

Even assuming interest rates start coming down again in April next year, as many expect, it will take time for homeowners to sort out their balance sheets and regain confidence and for banks to open the lending taps again. So prices may keep falling in real, and even in nominal, terms into the middle of next year.

And the problem is no longer just about higher interest rates and more caution on the part of the banks.

The risk now is that as economic growth slows, retrenchments could start affecting the housing market, driving more homeowners to default and possibly causing them to lose their homes. And if the global crisis hits SA's economy harder than we think, the housing market could be particularly hard hit. That then creates "negative equity", where people are trapped because their house is now worth less than the mortgage bond they raised to buy it.

But there's no need to be alarmist. And there is some good in the market gloom. Housing will start to become more affordable again, at least for those who have stable jobs, and with wage increases expected to remain fairly strong and interest rates coming down at some point, the bottom is not going to fall out of the market. And the debt bubble that financed the housing boom certainly couldn't have lasted forever. With household debt, most of it mortgages, still at nearly 77% of household income, SA's banking system and its households are vulnerable to a unexpected shocks. That has to come down to more frugal levels.