How long will the house price boom last? Prices in the last five years have more than doubled and continue to rise strongly this year. The Absa House Price Index has increased by 11% since December 2003, with prices in June 25% higher than in June 2003. These rates of growth are unsustainable and there are now signs of a slowing down. The month-on month increase between June and May was 16% at an annual rate compared to 21% in May and 26% in April.
Despite the slowdown, prices look set to continue to rise for the rest of this year and during 2005, reflecting an increasing demand for owning residential property. There are a number of reasons. Personal incomes are rising strongly in real terms as the economy expands in response to cuts in interest rates and an expansionary fiscal policy, consumer confidence is high, inflation is at relatively low levels and interest rates are at their lowest level in more than twenty years. In addition, household debt in relation to disposable income has fallen significantly in recent years. There is also a strong underlying demand for housing from the emerging middle class of previously disadvantaged groups and from investors in the buy-to-let market who believe the property market offers better returns than under-performing assets such as equities.
At the same time prospective buyers need to be aware of the risks of making sizeable investments in the next year. The rapid growth in residential property prices since early 2000 is in part a result of a “catching-up” after the fall in real prices from the mid-1980s to the late 1990s, and from a declining interest rate cycle that has now bottomed out. The stimulus from these factors is largely built into the current level of prices. Similarly, the effects on the economy from the recent fall in interest rates will also wear off, leading to a slower growth in personal incomes next year.
The major risk, however, is that the next movement in interest rates is likely to be upward, probably at the end of this year or early next year. Economists expect the increase to be 1-2% and predict rates may rise a further 1% during the first half of 2005, so that prime and home loan rates could be 13%-14,50% a year from now compared to the current 11,50%. There is also some evidence to suggest that the rental market is softening with lower yields making the buy-to-let market less attractive to investors, while the rapid growth in prices relative to household income means that the affordability of houses is gradually declining despite recent reductions in monthly repayments as interest rates have fallen. On the supply side there has been an acceleration in the supply of new housing in response to the house price boom. All of these factors will dampen the growth in prices but, given the underlying strength of the market, prices are still likely to rise in both nominal and real terms.
Our forecast is for an average increase in nominal prices of over 20% in 2004 as a whole compared to an increase of 19% in 2003. In 2005 average nominal prices are likely to increase by between 10-15% (a real increase of 4-9% given expected inflation of 6%), barring a sharp increase in interest rates.
Interest Rate Outlook: be prepared for rising rates
After five cuts in the prime overdraft rate and the home loan rate since June 2003 the next movement in interest rates is likely to be upward. Most economists believe the Reserve Bank will raise its repo rate either late this year or early in 2005, probably by 1%. Further increases are likely later in 2005 moving prime to perhaps 13-14,50% a year from now.
The Reserve Bank uses interest rates to control the level of inflation within its target range of 3-6% p.a. It intervenes in the money market to create a shortage of liquidity in the banking system and uses the repo rate, the interest rate which it charges banks for seeking liquidity from it, to influence interest rates in the banking sector and financial markets. The Reserve Bank is concerned that inflation may exceed 6% in the coming year, arising from strong domestic spending, the high oil price and the prospect later in the year of a depreciating rand exchange rate after its recent gains. Although the recent further strength of the exchange rate will curb inflationary pressures and may even delay the increase in rates, the current level of the rand is unsustainable in the long-run.
One of the effects of this more restrictive monetary policy will be to raise the cost of credit. You need to factor in the increased cost of repayments if you are considering moving house or buying a car. For example, a 3% rate increase from 11,50% to 14,50% on a 20-year home loan of R400 000 will raise repayments by R564 per month, while the repayments on a four-year, R100 000 car loan will go up by about R150 per month.
Car prices: a good time to buy
In May the Competition Commission launched an investigation into new car prices alleging that car manufacturers were engaged in anti-competitive practices, including price fixing, in contravention of the Competition Act. Following a complaint from a member of the public, the Commission established that Toyota had been practising minimum resale price maintenance (RPM) and fined the company R12 million. The results of the industry investigation will take some months and some consumers are expecting lower car prices as a result. This is unlikely. Although there is the possibility of further fines for minimum RPM policies by suppliers the end of these practices will not bring prices down given the low margins of dealers. In addition, price fixing between manufacturers is notoriously difficult to prove and is unlikely to exist given the large number of competitors in the country.
Nevertheless, the focus on the industry is good for consumers because manufacturers and distributors are unlikely to raise prices in the next few months without exceptionally strong reasons. And there appears to be no need for any increase in prices. Competition is increasing as the strong rand improves the competitiveness of imported brands and puts price pressure on domestic producers. The strong exchange rate is also helping local manufacturers by reducing the cost of imported components. Domestic cost pressures are generally low and with rising demand and output plus productivity gains, an increase in domestic wage costs in the industry is unlikely to raise prices. In the past year average car prices have not increased, according to government consumer price statistics. This is likely to continue for the next few months at least. The only concern for buyers is an increase in interest rates. These will probably go up at the end of the year or early next year.
Market Statistics
Change
Date in last year
Inflation
Consumer price index (Overall) May 0,6%
Consumer price index (excluding interest) May 4,4%
Vehicles May \0,0%
Rate
Interest Rates
Prime overdraft rate 23 July 11,50%
Repo rate 23 July 8,00%
Currencies
Rand Dollar 22 July 6,08
Rand Pound 22 July 11,16
Rand Euro 22 July 7,45
Index
Stock Markets
JSE All-share 22 July 9 989
Dow Jones 22 July 10 050
FTSE 100 22 July 4 360
Commodities
Gold 22 July $395 per ounce
Platinum 22 July $834 per ounce
Oil 22 July $38,19 per barrel
Quotable Quotes
Mark Twain
1. Put all your eggs in one basket – AND WATCH THAT BASKET.
2. Few things are harder to put up with than the annoyance of a good example
3. When I was a boy of 14 my father was so ignorant I could hardly stand to have the old man around. But when I was 21, I was astonished at how much the old man had learned in seven years.
4. Man is the only animal that blushes, or needs to.
5. I must have a prodigious mind; it takes me as much as a week to make it up.
6. Golf is a good walk spoiled.
7. What is the difference between a taxidermist and a tax collector? The taxidermist takes only your skin.
Oscar Wilde
1. If one tells the truth, one is sure, sooner or later, to be found out.
2. To love oneself is the beginning of a lifelong romance.
3. Education is an admirable thing, but it is well to remember from time to time that nothing that is worth knowing can be taught.
4. There is only one thing in the world worse than being talked about, and that is not being talked about.
5. The only way to avoid temptation is to yield to it.
6. Experience, the name men give to their mistakes.
7. Men can be analysed, women…merely adored.
Bob Hope
1. A bank is a place that will lend you money if you can prove you don’t need it.
George Bernard Shaw
1. We have no more right to consume happiness without producing it than to consume wealth without producing it.
On Love:
1. One word frees us from all the weight and pain of life: that word is love. (Sophocles)
2. Love sought is good, but given unsought is better. (Shakespeare).
3. Love one another and you will be happy. It’s as simple and as difficult as that. (Michael Leunig).
You can give without loving, but you cannot love without giving. (Amy Carmichael).
DontQ Stats July 2004 |
