Positive outlook for residential property

Outlook for the SA residential housing market
According to Jacques du Toit, Property Analyst at Absa Home Loans, the South African property market showed a steady performance in 2014, with nominal price growth of just above 9% and real price growth of about 3% after adjustment for inflation. Du Toit says a normalisation of and more balanced housing demand and supply conditions have largely contributed to the house price growth seen in 2014.

“The current investment horizon for residential property is believed to be around 5 years to allow for proper capital appreciation.”

Du Toit says that this was not a bad performance, taking into account last year’s economic trends and the ongoing financial strain experienced by consumers. According to Absa’s latest Housing Review, the average price of affordable homes increased by a nominal 6,4% in 2014, compared with growth of 3,5% in 2013. In real terms, prices increased by a marginal 0,3% last year, after declining by 2,1% in 2013. Middle-segment housing experienced a nominal price growth of 9,4% in 2014 (10% in 2013), while, in real terms, the average price of homes in this category improved by 3,1% in 2014, after real price growth of 4,0% in 2013. In 2014, a nominal price growth of 9,7% (5% in 2013) was recorded in the luxury housing segment. This translated into a real price growth of 3,5% in 2014 after adjustment for the effect of inflation (-0,7% in 2013). The following price changes occurred in the three middle-segment categories in 2014:

    • small houses (80m² ─ 140m²): 9,8% year-on-year (y/y) nominal and 3,5% y/y real;
    • medium-sized houses (141m² ─ 220m²): 7,5% y/y nominal and 1,3% y/y real; and
  • large houses (221m² ─ 400m²): 7,7% y/y nominal and 1,6% y/y real.

The latest indicators show that nominal middle-segment house price growth came to 8,4% (y/y) in February this year, down from 8,9% y/y in January and a recent high of 9,9% y/y in September last year. On a month-on-month basis, nominal price growth slowed down further, to 0,3% in February. “The gradual declining trend in nominal house price growth since late last year is much in line with continued subdued real economic growth of 1,3% y/y in the final quarter of last year. Full-year growth was 1,5% in 2014 (2,2% in 2013 and forecast at 2,2% in 2016). Somewhat higher interest rates and a continued low level of consumer confidence could also have played a role in the lower house price growth in early 2015,” explains Du Toit.

The outlook for house prices in 2015 is one of continued single-digit growth, against the background of the outlook for major economic and household sector-related factors, although base effects may cause price growth to be somewhat lower compared to 2013 and 2014, when price growth of 10% and 9,3% respectively was recorded. “Based on current expectations regarding nominal house price growth of around 8% and consumer price inflation of 4%, real price inflation is projected for this year, continuing on from the previous two years,” says Du Toit.

The aspects that drive the property market and, ultimately, property prices are believed to be:

Economic factors
Although South Africa’s inflation and interest rates are currently at the lower end of the scale, ongoing poor economic growth and continued high unemployment is putting downward pressure on growth in house prices.

Consumer factors
Consumers are experiencing a decline in real household incomes, a lack of savings, increased household debt, worsening credit risk records — more than 10 million credit-active South African consumers currently have impaired credit records — and a lack of confidence in their financial recovery. Increasing electricity- and transport costs are also influencing consumers’ finances negatively. These factors have a negative impact on house price growth, as it decreases demand in the housing sector.

Finance factors
The Reserve Bank has made it clear that South Africa is in a rising interest rate cycle. The current forecast is for interest rates to rise by 25 basis points in September this year, and by a cumulative 75 basis points through 2016, in order to curb upward inflationary pressures. Higher interest rates drive down the affordability of finance, and the resultant decrease in demand slows down growth in house prices. Furthermore, with more consumers struggling with debt and impaired credit records, banks may have to re-assess their appetite for risk, and possibly tighten their qualification criteria for mortgage finance.

Taking all these factors into account, Du Toit believes that investment in property is still advisable, as it contributes to the diversification of an investment portfolio, while capital appreciation and income can be derived from the investment in the long term. “The current investment horizon for residential property is believed to be around 5 years to allow for proper capital appreciation. However, buyers should keep in mind that property values and capital appreciation are determined by factors such as location and physical factors related to the property and the area,” concludes Du Toit.

Photos – Top: Absa; middle and bottom: iStock
Article from Absa Platinum ezine # 65

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