A question of which market you are in - house prices

According to Elna Moolman at Standard Bank, house price data continue to reflect softening consumer activity, while on the other hand Rode & Associates CEO Erwin Rode says that the lower priced housing market continues to grow.

In September, house prices were only 2.9% higher than a year earlier the slowest rate of growth since December 2002. The five-month moving average growth rate, a useful way of evaluating the trend growth in house prices, decelerated to 6.7% y/y in September from 8.7% y/y in August.

The moderation in the housing market is expected to continue on the back of deteriorating household finances and the decline in investors' yields.
The onslaught on consumers' finances from all around record-high petrol prices, soaring food prices and rising interest rates is taking its toll.

Admittedly, some consumer-related indicators remain quite strong.

Restrained household finances, combined with substantially reduced enthusiasm for buy-to-let properties from investors, means that the outlook for further expansion in the housing market is relatively bleak.

So far, there seem to be fewer investors entering the buy-to-let market, although they don't seem to be exiting the market on a net basis. If the deterioration in their yields were to lead to such a sell off, the prognosis for this market would be more distressing.

A 40% decline in interest rates (between 2003 and 2005), 30% growth in household income (cumulatively in nominal terms between the beginning of 2003 and the end of 2005), and roughly a million newly employed individuals over the past couple of years, in our view, adequately explain the growth in house prices.

Furthermore, the impact of economic fundamentals is generally larger than in many other asset markets, at least partly because the bulk of purchases are still being made for functional, rather than investment or speculative, purposes.

In South Africa, the upward interest rate cycle is expected to be modest, with interest rates expected to rise by about 20% during the current cycle, and economic growth is forecast to remain above 4%.

In addition, investors generally enter this market for the long-term capital gains and are cognisant of the fact that they are unlikely to profit from these investments in the short term.

The average property market investor also tends to be different from the average, say, stock market investor, with less regard for international markets.

At this stage, house prices are expected to consolidate at their elevated levels, with growth slowing to very low, albeit still positive, rates by the end of the year.

Admittedly, this, combined with accelerating inflation, would mean that house prices are likely to fall in real terms. However, declining real house prices simply mean that house price growth is being outpaced by increases in the prices of other consumer goods and services.

Car prices, for example, have been falling in real terms for a while now. Given the extent to which house price growth has exceeded growth in other prices during the recent property market boom, this reversal is hardly surprising.

On the other hand, according to Rode & Associates CEO Erwin Rode, the economic trickle-down reaches lower-priced homes.

While house-price growth in general continued to decline during the second quarter of 2006, the lower-priced section of the residential market grew at a faster rate than the middle and upper-priced sectors.

According to market data collected by Rode & Associates property valuers and economists, and analysed in the latest Rode's Report on the state of the property market, between 2000 and 2005, middle-priced houses put in the best performance, followed by upper-priced and lower-priced houses.

But, Rode's figures also show that since 2004, lower-priced houses started to outpace the more expensive suburbs.

"This can be ascribed to the fact that house-price growth has exceeded disposable-income growth for a number of years, forcing many buyers to scale down."

Rode says the increased activity at the lower end of the home market comparative to the other sectors, is also a sign that the trickle-down effect of the country's economic growth is showing signs of seeping through to the lower income groups. Even prices in the townships and inner-city flats are doing well.

Health warning:
This article should not be construed to offer advice. We have reported on findings from two separate entities and provided some insights. For investment advice speak to a specialist financial advisor.

Editors thoughts:
* We have included the health warning as a reminder to do research for your clients, evaluate their risk profiles and determine their expectations. Remember to build an accurate profile, based on the information you have been given. Also when researching new investments remember that golden rule if the returns are too good to be true, they generally are that too good to be true.