Residential property prices growth expected to remain in single digit this year

Residential property prices growth expected to remain in single digit this year

A combination of historically low interest rates and slowing growth in household disposable income will drag down demand for residential property in the near term.

On the back of the latest trends in house price growth and various factors affecting the housing market, single-digit nominal year-on-year price growth is forecast for the full year. Real house price growth is expected to continue to be driven by a combination of movements in nominal prices and consumer price inflation.

According to Absa monthly property price indices for May house price growth slowed down in May, based on nominal year-on-year growth in the average value of homes in the middle segment of the South African residential property market.

This is the result of base effects and a downward trend in monthly price growth since mid-2012, which was expected to eventually cause year-on-year price growth to moderate.

May this year saw middle-segment nominal house price growth tapering off to 11.1% year-on-year from a revised growth rate of 11.7% in April.

Also not helping the residential property market is the fact that economic growth is looking set to battle to exceed 2% for this year as a whole.

Real economic growth came in at a seasonally adjusted annual rate of only 0.9% in the first quarter of this year, after growth of 2.1% in the final quarter of last year.

Contractions in the real value added by the agricultural, electricity gas and water and manufacturing sectors contributed to the low first-quarter growth. The South African Reserve Bank expects real growth of 2.4% this year, improving to 3.5% in 2014. The headline consumer price inflation rate, at 5.9% year-on-year in February,

While the current level of interest rates set by the South African Reserve Bank is at multi-decade lows it has been priced in by the market.

In addition, interest rates continue to move sideways, with prime rate having remained at 8.5% since the third quarter of last year.

The stability of interest rates at these low levels has helped to gradually strengthen residential demand through last year and early this year.

“But it is questionable whether this residential demand strengthening can continue at a time of clear economic weakness, and where we have already seen a steady slowing in growth in the area of real consumer demand as a result,” First National Bank (FNB) property analyst John Loos says.

Loos says this year as a whole, “therefore, a weak economy and resultant weakened disposable income growth leads to the ongoing expectation that house price growth will continue to remain largely in single-digit territory in the near term, due to potential pressure on demand, not far outpacing consumer price inflation of near to 6%.”

Absa property analyst Jacques du Toit says Interest rates were kept unchanged in the first half of 2013, and are forecast to remain at current levels in the rest of the year before rising around mid-2014 to keep inflation under control.

“This interest rate projection is based on current trends in and prospects for the domestic economy and inflation. Continued low interest rates will support the property market and benefit the affordability of housing and mortgage finance,” he says.