House prices set to take off in 2007
After dipping into single-digit figures later this year, average
house price inflation could recover as 2007 progresses, moving
back into the 10 to 15% range, where it could remain for the rest
of the decade, argues John Loos, FNB’s property economist.
Loos contends that the current declining trend in house-price
growth will peak towards the end of this year and “the property
market will mend sooner than we think”.
“The prospect of good economic times ahead [which will fuel
growth in disposable income] and further interest rate reduction
suggest that we should make provision for further good times in
the housing market,” says Loos.
He explains that FNB’s economics team anticipates real economic
growth to average between 4 and 5% a year, and real domestic
expenditure growth between 5 and 6% to 2009.
Furthermore, adds Loos, with US Fed rates peaking, the dollar
coming under renewed pressure, and the rand’s prospects
looking promising, further interest rate reduction involving two
or more 50 basis point repo rate cuts in 2006 to 2007 is seen as
a strong possibility.
“On top of this, government revenue overruns could see further
personal income tax reduction.”
Most importantly, continues Loos, under the above economic
scenario, it is foreseen that the ranks of the middle class could
swell from 8m now to about 10m near the end of the decade.
Jacques du Toit, Absa’s property economist, concurs that the
market may turn next year.
He argues that the stable house-price levels may encourage
many people to look at property again as their incomes inch up
owing to personal tax cuts and constant interest rates.
“Moreover,” continues Du Toit, “demand in the middle to lower
segments [R1m and below] of the market will put upward
pressure on house prices.”
François Viruly, independent property economist, agrees that the
middle and lower end of the market will drive the sector “because
it is the segment that benefits most from GDP growth”.
But Viruly is not so optimistic about the R1m and more buy-tolet
market.
“Here prices may decline because rentals are not high enough for
investors to get the yields they are looking for,” says Viruly,
adding that something will have to give.
Meanwhile, according to the latest Absa House Price Index,
nominal house price growth was 14,9% year-on-year in January
2006 compared with a revised growth rate of 15,5% in December
last year.
House price growth reached a peak of 32% in 2004 and since
January 2005, it has been on a declining trend. But homeowners
can take heart because prices are still outstripping the headline
inflation rate (CPI) of 3,6% by 11,3%.
“This brought the average price of a house in the middle
segment of the market to about R752 300 in the first month of
the year,” says Du Toit, the author of the report.
The report says on a month-on-month basis, nominal growth in
house prices came to 1% in January compared with a revised
growth rate of 1,2% in December. “Real month-on-month growth
of 1,1% was recorded in December last year.”