Sector still viable

Dennis Dykes, chief economist of Nedbank’s Economic Unit says: “Residential property prices have been exceptionally strong over the past three years.

In the past year alone they have risen by over 20%, with some areas and types of housing enjoying even better performance.

“Supporting factors include lower interest rates, good growth in incomes, a growing middle class and lagging supply after many years of relatively low prices.”

Lower interest rates have played an important role over the past year. Prime falling from 17% to 11,5% in the second half of 2003 increased affordability and therefore demand.

This has been the major driver behind the housing booms internationally, where interest rates in key economies are at their lowest levels in decades and house prices are at historical highs.

Affordability has also improved as real personal disposable incomes rise. Wage and salary growth has consistently exceeded inflation and personal tax breaks in 2002 and 2003 also helped.

Demand has been further fuelled by the changing socio-political environment, which has also helped create a growing middle class.

Lindiwe Kubeka, head of Nedbank Homeloans adds: “The dramatic rises and increased speculation in the buy-to-let market have raised concerns that prices may be in a bubble phase.

Some of the market could be vulnerable in the short term, particularly if interest rates rise unexpectedly quickly and the current upswing is cut short.

“However, looking ahead we believe the residential property market remains a viable and sustainable long-term investment.

We require investors to prove the reliability of their rental income as some rental incomes have softened in areas where we have seen numerous developments.

“Investors should also ensure that they have sufficient cash reserves to cover any unforeseen circumstances, such as a loss of rental income, maintenance costs and repairs.”