Scorching South African house prices are projected to continue rising well into 2005, despite concerns about the property market being in a bubble that is about to burst.
In its monthly report on house-price movements, banking group Absa notes that a nominal year-on-year increase of 27,7% was recorded in house prices in July 2004. The Absa House Price Index also notes that the revised growth in house prices in July came to 26,8%, while the year-on-year growth during the first eight months of the year averaged 25%.
In real terms, notes ABSA, year-on-year growth of 24,9% was recorded in July compared with a revised 24,4% in June.
The Absa House Price Index is based on the total purchase price of houses in the 80m²-400m² size category, valued at R1,6-m or less (including swimming pools, fencing and other improvements), in respect of which loan applications were approved by Absa.
Jacques du Toit, Absa’s property economist and the authour of the report, explained that the real growth in house prices is based on the most recent headline consumer price inflation figures, which measured 1,6% year-on-year in July. The average real year-on-year growth during January to July 2004 was 23,8%. “The strong real growth is based on a relatively low headline CPI inflation rate of 0,7% on average during this period,” he said.
Du Toit notes that against the background of continued strong increases in house prices, fears of a price bubble in the residential property market still persist.
But Du Toit affirms that there are mitigating factors against a property price bubble. He says these are based on the recent long-term analysis of indicators such as the ratio of house prices to remuneration, the level of real house prices and the price difference between new and existing houses in SA - which have indicated that these variables are currently not at historical highs, especially if compared with the property market boom of the early 1980s.
“In addition to these indicators, there are many factors currently supporting the property market, which were not present or entirely different to the early 1980s,” he said.
Du Toit identified these factors as personal tax relief; lower transfer duties on property; strong growth in the real disposable income of households; a relatively low ratio of household debt to disposable income; the improved investment status of property compared with that of other asset classes - taking into account volatility, risk and return and relatively low inflation and interest rates.
In view of the abovementioned indicators and various supporting factors, says Du Toit, the residential property market is still regarded as being in an extended boom phase rather than experiencing bubble conditions.
Du Toit further notes that unlike in the mid-1980s, interest rates are not expected to increase sharply during the next three years. “The rand exchange rate is projected to depreciate gradually against the major international currencies over this period, which will contribute to CPIX inflation remaining within the inflation target range of 3%-6%, he says, adding that these developments will support a policy of stable interest rates during this period.
Looking ahead, Du Toit paints a rosy picture of the property market. “In nominal terms, house prices are expected to increase by no less than 25% (22,5% real) on average in 2004 and another 15% (9,5% real) in 2005.”
Posted: 2004/09/06 Mon 17:06 | © Moneyweb 1997-2004 |
