Declining trend in house price growth continues

Nominal house price growth has been in a downward phase for the past two years after peaking at 35,4% year-on-year in October 2004. In November 2006, nominal price growth of 12,7% year-on-year was recorded (13,3% in October). The average price of a house in the middle segment of the market (see explanatory notes) came to R841 000 in November. The average nominal growth in house prices was 14,6% year-on-year in the period January to November this year.

In real terms, year-on-year growth of 7,5% was recorded in October compared with a revised growth rate of 8,1% in September, based on the headline consumer price index. Average real year-on-year house price growth of 9,9% was recorded in the first ten months of 2006.

On a month-on-month basis, nominal growth in house prices was 0,7% in November compared with a revised growth rate of 0,9% in October. House prices increased by 0,6% month-on-month in real terms in October (0,7% month-on-month in September).

According to data released by Statistics South Africa, inflation increased further in October, especially with regard to producer prices and food prices. The price of Brent crude oil jumped to above $60 dollars/barrel recently, while the rand displayed some volatility against the major international currencies over the past week. If the rand exchange rate remains at current levels or depreciate further, the higher oil price may lead to an increase in domestic fuel prices in the near future after four consecutive months of price reductions.

Against this background, the Reserve Banks Monetary Policy Committee is expected to raise the repo rate by 50 basis points to 9% tomorrow, 7 December. Further rate hikes of 50 basis points each are projected for February and April next year. Banks are expected to raise their lending rates by the same magnitude, which will bring prime and variable mortgage interest rates to a level of 12,5% by year-end and 13,5% by April 2007.

Average house price growth for 2006 is estimated at about 14,5% in nominal terms, taking into account price growth of 14,6% on average recorded in the first eleven months of the year. Nominal house price growth of around 8% is forecast for 2007.

Jacques du Toit,Senior Economist
Source - Published by: Absa Group Economic Research