Affordable housing

In the third quarter of 2006, nominal house prices in the affordable category increased by only 0.5 per cent year-on-year (y/y) compared with an increase of 6.3 per cent y/y in the preceding quarter. In real terms, house prices in this category declined by 4.7 per cent y/y in the third quarter, whereas real year-on-year growth of 2.2 per cent was recorded in the second quarter.

Middle-segment housing

House prices in the middle segment of the market increased by a nominal 13.8 per cent y/y to about R818,300 in the third quarter of 2006 compared with the 14.7 per cent y/y recorded in the second quarter. The 13.8 per cent y/y increase was the lowest nominal growth in any quarter since the first quarter of 2002, when a growth rate of 13.7 per cent was recorded. In real terms, house price growth came to 7.9 per cent y/y in the third quarter (the lowest real growth since the first quarter of 2003) compared with 10.3 per cent in the second quarter of the year.

The year-on-year price growth of medium-sized houses leveled out at just above 16 per cent in the first three quarters of 2006, with the focus probably shifting from larger, more luxurious properties in view of the issue of the affordability of housing in general. During the next few quarters, price growth in the medium-sized segment will be closely watched for any signs of weakening on the back of higher interest rates, such as that with regard to smaller houses in the third quarter.

Luxury housing

Nominal house prices in this segment of the market increased by an average of 7.6 per cent y/y in the third quarter of 2006, compared with an increase of 8.1 per cent y/y in the second quarter. In real terms, house prices in the luxury category increased by 2.1 per cent y/y in the third quarter of the year, following a real price increase of 3.8 per cent y/y in the second quarter.

The continued low growth in house prices at the upper end of the market since the second quarter of 2005 is related to a strong supply of properties in this market segment during recent years, whereas demand started to taper off in late 2004 because of the high prices caused by strong price growth in 2003 and 2004.

Regional house prices

On a provincial basis, growth in house prices in the middle segment of the market remained relatively strong in some provinces in the third quarter of 2006. Nominal house price growth varied from as high as 30.7 per cent y/y in Mpumalanga to only 9.2 per cent y/y in the Western Cape.

In the country’s major metropolitan areas, nominal house price growth varied from 21.4 per cent y/y in the central and southern parts of Johannesburg in the third quarter to 9.2 per cent y/y in the Cape Town area.

Price growth in the mainly rural regions of Mpumalanga (30.7 per cent y/y), the Northern Cape (29.5 per cent y/y), Limpopo (23.7 per cent y/y) and North West (19.7 per cent y/y) remained strong in the third quarter of the year compared with the country as a whole (13.8 per cent y/y). This can be ascribed to factors such as:

• the upturn in the property market, which started at a much later stage in these regions than in the big metro areas around the country;
• the generally low level of house prices in these areas at the start of the upturn;
• the demand for housing by people wanting to get away from busy urban lifestyles over weekends and during holidays;
• the demand for housing by people opting to retire and work (e.g. artists) in rural areas; and
• a limited supply of housing.

Building costs and new and existing house price trends

The cost of building a new house increased by a nominal 10.3 per cent y/y in the third quarter of 2006, compared with a growth rate of 10.5 per cent y/y in the preceding quarter. This above-inflation increase in building costs is a reflection of the level of activity in the building and construction sector. The demand for building materials and skilled labour has also contributed to this development.

However, the nominal year-on-year growth in building costs continued its downward trend, which commenced in the third quarter of 2004, up until the third quarter of 2006. This can be ascribed to the large number of developers and building contractors active in the property market, which leads to greater competition. The slowing down of the residential market since late 2004 also played a role.

The average price of a new house increased by a nominal 11.6 per cent y/y to about R832,900 in the third quarter of 2006, which meant an increase of 5.9 per cent y/y in real terms. The average price of an existing house increased by a nominal 14.9 per cent y/y to about R820,200 in the third quarter, which brought the real price increase to 9.0 per cent y/y.

The nominal price difference between new and existing houses was stable at 1.5 per cent, or just more than R12,000, during the first three quarters of 2006. This is the smallest price difference recorded since mid-1989. The price difference between new and existing houses has declined sharply since mid- 2003, when it reached an all-time high of R173,200, or 31.2 per cent.

Land prices

In the third quarter of 2006, nominal residential land prices increased by 17 per cent y/y to about R292,300 on average, compared with growth of 18.2 per cent y/y in the second quarter. Real growth in land prices of 11 per cent y/y was recorded in the third quarter, compared with 13.56 per cent y/y in the preceding quarter.

The scarcity of suitable and properly serviced land for residential development has been a problem for some time, especially in the rapidly growing urban areas of the country. These conditions are not expected to improve materially and will be reflected in vacant land prices in years to come. Along the coast, the value of residential land with good views has also increased significantly over the past few years. As the supply of and demand for vacant land are, to a large extent, moving in opposite directions in these areas, prices are expected to escalate further in future.

Mortgage finance

Commercial banks’ variable mortgage interest rates increased by 50 basis points in both August and October to reach 12 per cent after the Reserve Bank’s Monetary Policy Committee hiked the repo rate to 8.5 per cent at its October meeting. Interest rates have been on an upward trend since June this year.

Based on an average house price of R818,333 in the middle segment of the market in the third quarter of 2006, the monthly repayment on a new mortgage (100 per cent over a 20-year repayment period at a variable mortgage rate averaging 11.3 per cent) amounted to R8,633. In the same quarter of last year, the comparable repayment was R7,180, calculated at an average house price of R719,159 and an average mortgage rate of 10.5 per cent at the time. The difference of R1,453 between these monthly repayments can be ascribed to house prices being 13.8 per cent higher in the past quarter than they were a year ago, whereas the mortgage rate was on average 80 basis points higher than in the third quarter of 2005.

Affordability of housing

Based on interest rate and house price trends in the third quarter of 2006, the average mortgage repayment and the qualifying gross income levels were 20.2 per cent up on the same quarter last year. In the third quarter of 2005, this growth rate was still at 15.5 per cent.

The house price-to-remuneration ratio tapered off somewhat in the first quarter of 2006 (the most recently data available for remuneration) from the preceding quarter. This was the net result of house price growth slowing to 16.4 per cent y/y at the time, whereas nominal growth in remuneration was 7.3 per cent in the first quarter of 2006 compared with 4.4 per cent in the fourth quarter of last year.

The mortgage repayment-to-remuneration ratio, which can also be regarded as an indication of the affordability of mortgage debt, also declined slightly in the first quarter of the year. This development in the mortgage repayment-to-remuneration ratio can be ascribed to slower-growing house prices and low interest rates over the past twelve months, whereas growth in remuneration remained relatively strong.

The decline in the abovementioned two ratios from the final quarter of 2005 to the first quarter this year implies that the gap between house price growth and mortgage repayments, on the one hand, and remuneration, on the other, has narrowed. This means that housing was, in effect, slightly more affordable in the first quarter of 2006 compared with the fourth quarter of 2005. Future trends in these two affordability ratios will depend on developments with regard to house prices, interest rates and remuneration.

Outlook

CPIX inflation increased further in the third quarter of 2006 on the back of volatile international oil prices, a weaker rand exchange rate and higher food price inflation. CPIX inflation is projected to rise further to above 6 per cent by year-end. The deficit on the current account of the balance of payments remained above 6 per cent of GDP in the second quarter of 2006, which contributed to the rand depreciating significantly against the major international currencies in recent times. Year-on-year private sector credit extension remained high, with mortgage advances growth at around 30 per cent over the past few months compared with a year ago.

Against this background, interest rates are forecast to rise further, by 50 basis points at each of the Monetary Policy Committee meetings in December this year, and in February and April next year. This will bring the prime interest rate and the variable mortgage interest rate to 12.5 per cent at year-end and 13.5 per cent by mid- 2007.

As a result of these expectations, house prices are projected to increase by 13.7 per cent y/y in nominal terms in 2006, taking into account the price growth of 14.9 per cent on average recorded in the first three quarters of the year. Nominal house price growth of 5.9 per cent is expected for 2007, with prices declining by 1.9 per cent in real terms. This will be the first real decline in house prices since 1999.

Biography

Jacques du Toit is Senior Economist at Absa Group Economic Research, South Africa, which provides advice and information regarding global and domestic economic trends and properties.

Serving some eight million customers, Absa Group operates nearly 700 branches and more than 6,000 ATMs primarily in South Africa. In mid-2005, Barclays acquired a-56 per cent-stake in Absa, which makes Barclays the biggest bank in Africa and one of the country’s largest single foreign investments since 1994.