SA house prices - Some recovery signs

Although the growth in SA house prices is not stellar, it has exhibited some recovery signs since 2009 and affordability is on a good path again।

But it is still a lot cheaper to buy an existing house than build a new one.
Based on the outlook for nominal house price growth and a projected average consumer price inflation rate of about 5% in 2010, real price growth of between 5% and 5,5% is forecast for this year and 10,5% in nominal terms।

So says Jacques du Toit, property strategist at Absa, who adds that this will occur after house prices dropped by a real 6,9% in 2009 and declined by 6,3% in real terms in 2008.
“House price growth has improved markedly in the first half of 2010, based on the better economic conditions since the second half of 2009, low interest rates, banks’ less tight lending criteria as well as base effects।”

“However, taking into account house price developments in the recent past, year-on-year (y/y) price growth appears to be near an upper turning point, largely as a result of the base effects of a recovery in house price growth in the second half of 2009। This is expected to impact the trend in price growth in the second half of this year.”

He says after the affordability of housing deteriorated in the second half of 2009 on the back of rising house price growth while growth in household income remained under pressure, affordability did not deteriorate further in the first quarter of 2010. “This is based on the latest trends in the ratios of house prices and mortgage repayments to household disposable income.”
He says the ratio of house prices to disposable income was relatively stable in the first quarter of the year compared with the last quarter of 2009, which was the net result of house price and nominal disposable income growth in the first quarter।

“House prices increased by a nominal 3,2% quarter-on-quarter (q/q) in the first quarter of 2010, while households’ nominal disposable was up by 3,6% q/q in the same period। The ratio of mortgage repayments to household disposable income was slightly down in the first quarter of 2010 compared with the preceding quarter.

“This was the net result of the abovementioned trends in nominal house prices and household disposable income in the first quarter, while the mortgage interest rate was on average slightly lower during this period।”

In the affordable segment of the market (houses of 40-79sqm, priced at up to R430k) the average price of a house increased by a nominal 2,6% y/y to a level of R296,100 in the second quarter (Q2) of 2010, declining by 1,9% in real terms।

Middle-segment house price growth (houses of 80-400sqm, priced at up to R3,1m) averaged a nominal 14,4% y/y in the second quarter of 2010। This brought the average price to a level of R1,075,600 in the quarter. House prices in the middle-segment increased by a real 9,4% y/y in the second quarter of the year.

In the luxury segment (houses valued at above R3,1m up to R11,5m), the average price dropped by a nominal 1,8% y/y to a level of about R4,4m in the second quarter of the year। In real terms prices of houses in the luxury segment were down by 6,1% y/y in the second quarter.

Du Toit said at a geographical level home values increased further in nominal terms on a y/y basis in the second quarter of 2010, while in real terms prices were slightly down in some areas compared with a year ago। On a quarterly basis prices were down in both nominal and real terms in a few provinces, metropolitan areas and coastal regions.

“These trends might be an early indication of expected price developments towards the end of the year,” he said।

At a provincial level, nominal year-on-year (y/y) house price growth varied between 7,1% in Mpumalanga to as high as 24,9% in the Eastern Cape in the second quarter of 2010।

In the major metropolitan areas house price growth ranged from a nominal 3,2% y/y on the East Rand in Gauteng to a relatively strong 22,6% y/y in the Durban/Pinetown area in KwaZulu-Natal in Q2 2010।

Another encouraging trend is the fairly strong rise in house prices at coastal level, where much of the buying activity is centred on second and leisure homes। These properties are being shed by investors at an unprecedented pace as affordability comes under pressure.

Du Toit said house prices in the coastal regions increased by a nominal 7,8% y/y in the second quarter of 2010, after rising by 6,3% y/y in the preceding quarter। “This is an indication that the coastal market is recovering at a steady pace, but is still lagging in price growth compared with some other regions.

“In real terms, house prices in the country’s coastal regions increased by 3% y/y in the second quarter of 2010, after rising by 0,6% y/y in the first quarter of the year।

Moving onto building costs, Du Toit pointed out that in the second quarter of 2010 the cost of building a new house in the middle segment of the market increased by a nominal 7,8% y/y, which is up from a growth rate of 6,7% y/y recorded in the first quarter।

“Although the residential building and construction sector is experiencing tough conditions, judging from the latest trends in the planning and construction phases of new housing, the upward trend in building cost increases over the past two quarters is probably related to rising costs such as wages, transport, etc॥”

“Against this background of faster rising building costs over the past two quarters, the average value of a new house increased by a nominal 15,5% y/y to R1,396,200 in the second quarter of the year (12,9% y/y in the first quarter), which came to a real increase of 10,4% y/y (a real 6,8% y/y in the preceding quarter)।

The average value of an existing house increased by a nominal 14,6% y/y to about R1,067,500 in the second quarter of 2010 (10,1% y/y in the first quarter)। In real terms this translated into an increase of 9,6% y/y in the second quarter (4,2% y/y in the preceding quarter).

“As a result of the abovementioned price trends, it was around R328,700, or 23,5%, cheaper to buy an existing house than to have a new one built in the second quarter of 2010.”
He said land values for new housing increased by a nominal 14% y/y to an average of about R498,100 in the second quarter of 2010, compared with an increase of 7,1% y/y in the first quarter।

“In real terms land values increased by 9% y/y in the second quarter (up by 1,3% y/y in the preceding quarter)। The faster pace of year-on-year (y/y) growth in land values in the second quarter of the year is evident of improved residential property market conditions in many areas up to mid-2010.

“Along the coast, however, land values for new housing still experienced some downward pressure in the second quarter of the year, declining by a nominal 4,4% y/y and a real 8,6% y/y in the quarter। This brought the average nominal value of a coastal stand to a level of about R430,900 in the second quarter.”

More good news is that mortgage finance is now also a lot cheaper than two years ago.
Du Toit says commercial banks’ variable mortgage interest rate is currently 10%, which is at its lowest level since mid-1974।

“Moreover, as a result of the interest rate cuts over the last 18 months, monthly mortgage repayments are 28,7% lower compared with December 2008, when the mortgage rate was still 15,5%।”

Meanwhile, the Lightstone National House Price Index has continued its rising inflation path, reaching 8,3% in April 2010, up from a y/y inflation rate of 8,2% in March and 7,7% in February, it showed on Monday।

The lower inflation rate environment started feeding through earlier in the year, and while coastal properties provided something of a drag until February, those properties have caught up in April via a handsome rate of 8%। They were growing at just 5,3% in February.

The index showed an interesting turnaround occurred for Johannesburg properties as their growth dipped to 7,8% from 8,6% in March and after boasting the highest growth rates in the country for some time।

The best performing province in March was Cape Town at a healthy 9,8% click.
Affordable houses, though, ratcheted up by 14,7% from 12,6% as luxury home growth rates dipped to 7,6% from 8%.