House Prices

Private Property South Africa
Gina Schoeman

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.

1) House price - Standard Bank

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.

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