Category Investments

Real house prices could slide through 2010 too

27 October 2009 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

Is South Africa facing a third consecutive year of declining real house price growth? You wouldn’t entertain the notion if you subscribed to real estate agents’ assessments of the domestic property market. But if you look at statistics from the big banks you get a different picture. Absa Home Loans’ Housing Review Q4 2009 warns of a third year of negative real house price growth in 2010.

Would you like affordable, middle-segment or luxury?

Absa reports house price statistics across a number of property classes, namely affordable, middle-segment and luxury. The group bases its statistics on “the total smoothed purchase price of houses (including all improvements) in respect of which loan applications were approved by Absa Bank.” What’s happening in the domestic property market right now?

Absa reports the average nominal price of affordable housing – houses of 40m² to 79m² and priced at R430 000 or less – increased by 2.1% year-on-year (y/y) in Q3 2009. Prices in this category increased by 1.2% quarter-on-quarter (q/q). After adjusting for inflation affordable houses declined 4.2% y/y. A similar trend played out in the middle-segment. Nominal house prices in the middle-segment declined 7.2% y/y in the third quarter as the average price dropped to R957 900! Absa includes three typical houses in its middle-segment category. These include small houses (80m² to 140m²) medium houses (141m² to 220m²) and large houses (221m² to 400m²). Declines were more severe in the first two sub-categories (at -10.3% y/y real and -10.5% y/y real) than in the latter sub-category (-4.3% y/y real). Luxury houses that typically change hands for R3.1m to R11.5m weren’t spared either. Absa says prices in the luxury category declined 9.9% y/y real.

Was there any good news in the third quarter? Absa says nominal house price deflation may be a thing of the past early in 2010. Unfortunately they pour two streams of cold water on this news. First they predict higher inflation over the period. And second they note few households are in a position to take advantage of improved house affordability. House price growth will be confined to niche sectors around major towns and cities inland. But “coastal property markets may take some time before showing signs of sustainable growth!”

Is Joe Average ready to buy a house?

What makes the housing market tick? If you strip out the economic chaff you’re left with six cogs in the housing transaction machine. There’s a willing buyer, a willing seller, an asset (the house), a lender (the bank) and a couple of facilitators (the estate agent and the mortgage originator). Which of these cogs is most important? You can complete a sale without assistance from a mortgage originator or real estate agent. And neither asset nor seller (assuming the seller is a willing participant at a particular price) plays a major part in the process either. This means there are two parties that have to ‘perform’ for the deal to go ahead. The buyer has to raise finance by way of a mortgage loan from a bank, which must lend to the buyer.

House prices fall when buyers or banks take strain. Last year banks struggled with liquidity. They raised deposit requirements and rigorously applied the affordability criteria contained in the National Credit Act (NCA). As liquidity concerns abate attention has turned to the buyer. Absa reckons the buyer’s position is steadily improving due to declining house prices and improving net disposable income. “The ratio of house prices to household disposable income was (in the second quarter) at its lowest level since the third quarter of 2004,” said Absa. The mortgage repayment to household disposable income ratio is improving too. But these trends combined with lower interest rates and softer lending criteria might not be enough to reverse real price declines through Q4 2009 and the first half of 2010!

You cannot talk about a house price recovery without addressing the general economy. It seems South Africa will emerge from technical recession in Q3 2009, though we still need the Statistics SA GDP number to confirm this. Economists expect the economy to contract by 2.1% for full-year 2009 before posting real growth of 2.3% in 2010. Absa offers a similar assessment for residential real estate prices. “Nominal year-on-year house price deflation is set to be a thing of the past in the near future,” said Absa. They’ve pencilled in a real decline in house prices of 8.5% for the full-year. Next year the ‘story’ will be around increased activity rather than impressive price improvements. The group expects nominal growth of only 2% to 3%. And that means homeowners will face a third successive annual decline (in real terms) in house prices.

Editor’s thoughts: Statistics and real economic activity seldom intersect. If you page through any property listing you’re likely to dismiss Absa’s figures out of hand. Yet the bank is at the coalface and has instant access to transaction values. Are the house price statistics gathered by Absa and other banks meaningful? Add your comments below, or send them to


Added by HALINA LEONOWICZ, 09 Nov 2009
It is time that the price for house is in relation to more than the square metres. South Africa is full of "the same". Even so called luxury houses do not have luxury in them in terms of functionality. There is no atmosphere in the spaces, the function and positioning on site is seldom right. I would estimate that this is 95% of all stock! This is scary how much building material is lost for saving on good design. Most of this cannot be corrected withh even doubling the cost. How it is that small well designed car is accepted for much bigger price while the house is seen only in terms of square metres?!
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