The slowdown in the housing market is now clearly entrenched, with a
persistent deceleration in the growth of house prices.
In June, house prices grew by 6.5% y/y - the lowest since January 2003.
Although the monthly numbers, like most economic indicators, are inherently
volatile, this corroborates the slowdown in consumer activity reflected in other
indicators such as retail and car sales. This slowdown is expected to be
aggravated by the moderate rise in interest rates. House prices are expected to
consolidate at their current, elevated levels, which should still imply a
reasonable average growth for the year, albeit sharply lower than before.
Last year, South Africa experienced the highest house price growth in the
world according to The Economist. Following such rapid growth, and in the
absence of fresh stimulus following, amongst other supportive factors, the
earlier 6,5 percentage points drop in interest rates, a slowdown is to be
expected. Far from a boom-bust scenario, South Africa's property market, albeit
losing the vigorous pace it enjoyed over previous years, has entered a more
stable period. Other countries, such as Australia, the United Kingdom and the
United States, also appear to have escaped a rapid decline in house price growth
and instead are experiencing gradual slowdowns.
The deceleration in house price growth is more than a loss of momentum and
absence of fresh stimulus. Consumers' ability to pay higher house prices are
constrained by rising interest rates and the combined impact of sharp rises in
petrol and food prices, which limits further house price growth. Furthermore,
deteriorating prospects for capital gains, alongside a moderation in rental
growth, have been reducing the allure of the property market for investors. This
significantly dampens the demand for residential property and consequently
reduces the pressure on house prices.
In other words, the sharp decline in house price growth measured in June
therefore reflects both an underlying trend and some short-term volatility
inherent in the data. For a proper interpretation of the data, it is therefore
important to understand how house price indices are constructed.
Unpacking the Standard Bank House Price Index
Constructing house price indices is notoriously difficult. Apart from the
challenges that are generally faced when constructing indices, measuring house
prices is complicated by the fact that the available data usually stem from the
properties sold during a particular period, rather than from a well-designed
sample that is representative of all houses. This is aggravated by the
heterogeneity of houses. This means that the data need to be interpreted
carefully, as changes in the measured prices may be due to:
actual changes in the general price level;
changes in the distribution of the houses being sold, for example more
sales of luxury houses, may push up the measured house prices even without
changes in general prices; or
the changes may simply be random.
Furthermore, national data from the Deeds Office are available only with a
relatively long lag of up to nine months, so current indicators of the housing
market are usually based on a particular institution's experience. In this
report, data from the Deeds Office are used wherever possible, and are
supplemented by data from mortgages granted by Standard Bank, which has a market
share of about 25.4% of all new mortgages registered. The data from these two
sources are generally highly correlated. Nevertheless, it should be kept in mind
that the data are representative of Standard Bank's client base, and may
therefore differ from the data of other institutions.
Standard Bank's House Price Index is based on the median price of all houses
mortgaged by Standard Bank. The median house price is one of the most common
measurements used globally to calculate house price indices. The unsmoothed data
are presented to prevent the choice of smoothing technique from influencing the
results, and also to prevent the smoothing from masking incipient trends that
might be meaningful, such as the pick-up in house price growth following the 50
basis point interest rate cut in 2005. Nevertheless, a 5-month moving average is
added to the graphs to highlight the general trends.
In June, the median house price grew by 6.5% from the year before (see Figure
1). The deceleration in house price growth corroborates the slowdown in consumer
activity reflected in indicators such as retail and car sales. Furthermore, the
relatively low growth in June could be at least partly attributed to the
increased number of relatively affordable houses being sold. For example, up to
April, sales of houses costing less than R500 000 declined as a proportion of
total sales. In May and June, however, sales of houses in this price class rose
relative to total sales. With relatively more houses being sold for prices below
the average and median, both measures would have been pulled downwards.
This might have been a result of the noticeable reduction in transfer duties
on houses priced below R500 000 from 1 March 2006, but also of the Financial
Sector Charter-related increase in transactions in "affordable" housing . Even
though the transfer duty cost declined across the price spectrum, houses sold
for less than R500 000 benefited (as a percentage of the price) relatively more.
The increase in the volume of transactions at the lower end of the price
spectrum also explains why the growth in mortgage advances still exceeds the
growth in house prices. But even here an imminent slowdown is already reflected
by the month-on-month growth rates, in which the turning point will precede that
in the year-on-year growth rates. (Total mortgage advances would also be boosted
by an increase in further advances on existing mortgage loans.)
The bottom line
The domestic property boom coincided with a global increase in property
values and a very benign macro financial setting. The deterioration in
households' financial situations on the back of record-high indebtedness, a
record-low savings rate, record-high petrol prices and rising interest rates
will constrain further growth in the short term.