The outlook for residential property prices
Predicting what the local residential property market will do has been an easy game in the last few years. Since 2002 the average price of houses in South Africa across all market segments has been steadily rising.
In the second half of 2006 the Reserve Bank saw fit to raise interest rates a number of times, effectively hiking the base lending rate by two percentage points. Regardless of what various commentators say, these actions have had a definite impact on the property market. House price growth slowed significantly in the last quarter of 2006, and while the latest Absa House Price Index shows some resurgence early in 2007 it is more likely the falling trend will prevail for the remainder of the year.
Despite the less than rosy outlook for capital growth, the local property market will still be underpinned by demand from South Africans purchasing houses as primary residences. This is evidenced by the continued strong growth in mortgage advances. Total advances broke through R700 million early this year.
Treat self-serving reports with care
When reading articles about property it is always important to consider the sources. Many estate agents and property developers contribute to magazine and local newspaper articles on the subject. The problem is they remain blindly positive about the property market. Perhaps they do so because they have to be optimistic about their livelihoods. But as a property investor or buyer you should certainly consider the source of your information.
Another important consideration is that indicators such as those mentioned in this article are largely historic. Absas house price index and Statistics SA's CPIX number are based on events which have already occurred. This means to determine what might happen to property in coming months we have to speculate on various events which might occur in the domestic economy.
Once these events are identified, we need to consider their impact on the housing market. And only then can we guess at whether house prices will continue to grow - or fall.
Interest rates remain a real threat
A real threat to the local residential property market is inflation. Rising inflation puts pressure on the Reserve Bank to raise interest rates - which in turn make houses less affordable for the average house buyer. The accepted measure of inflation is the CPIX published by Statistics South Africa. February CPIX, released on Wednesday, came in at 4.9%.
Because this number was so much better than analysts expected, there is renewed talk that the South African interest rate cycle has peaked. In reality, there are just as many early signs that another rate hike is on the cards.
The warning signs come in the form of price inflation of domestic goods. There is talk of maize and wheat shortages which will drive the price of locally produced food higher. Recent media reports reveal a growing milk shortage which will undoubtedly lead to price increases. And the oil price is spiralling upward again on the back of further production cuts by OPEC. The latest indication is that our next petrol price increase might be in the order of 70 cents per litre, on top of an already stiff increase of 24 cents per litre in March.
Buyer beware
There is enough evidence to suggest further increases in the prime lending rate. If nothing is done in April, then the pressures will definitely mount significantly by the time the Monetary Policy Committee meets again in June.
If you are buying a house in the next couple of months it would be sensible to make sure that your budget allows for an increase in the prime lending rate. Each 1% increase in interest rates means that you will pay R356 per month more on a R500, 000 20-year mortgage.
Editor's thoughts:
Residential property prices will remain under pressure in 2007. Would you be a buyer of residential property in the current climate - or would you prefer to sit on the fence until the upward price trend is re-established? Send your thoughts to [email protected].
