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Property Prices set for Quiet Year Ahead

11 January 2007

Property owners may have to wait until next year for the residential market to pick up again and deliver stronger growth, the latest Absa house price index released yesterday suggests.

The declining price growth trend, which has been the main feature of the market for the past year, will be further entrenched this year on the back of a tighter economy.

The residential property market is continuing its downward growth trend, with nominal house-price growth of 13,5% year on year recorded last month, the lowest in about four years.

This is due to a relatively expensive property market, which has caused demand to drop off.
According to the Absa index, this 13,5% growth in the middle segment of the market is down from a revised growth rate of 14% in November.
This brought the average price of a house in this segment of the market to about R857400 at the end of last year.

The Absa index is based on the total purchase price of houses in the 8Dm2- 40Dm2 size category and valued at R2,7m or less. But some property commentators were surprised by the 13,5% growth rate last month, saying that the effects of the rising interest rate environment had obviously not kicked in yet.

Absa senior economist Jacques du Toit said the decreased affordability of housing had driven the declining trend. He said higher interest rates this year would also play a role during the course of the year in dampening the market.

"We are going to see this declining growth trend for most of the year."

But he said he expected the residential market to turn around and experience a gradual upward trend in price growth next year on the back of an expected lower interest rate and inflation environment that year.

"These factors will support the broader economy and property market," said Du Toit.

Du Toit said nominal house-price growth of about 9% year on year was forecast for the year with prices set to increase about 3% in real terms.

He said house-price growth was expected to improve to above 10% on a nominal basis during 2008 and into 2009.

Property economist Erwin Rode, of Rode & Associates, said he found last month's growth rate still "surprisingly high".

"But one must remember that the bite of rising interest rates hasn't even started. There is a lag of about three quarters. One must expect the deceleration in price growth rates to gather momentum," said Rode.

Ronald Ennik, MD of Pam Golding Properties in Gauteng, said the residential property market would continue to "tighten" this year.

Ennik said he did not believe actual prices would decrease, only the rate of growth. He said the reason rate increases had not slowed the market down even more was because the "buoyant times" the market had experienced over the past five years had created a "very comfortable cushion for property owners".

"Their (property owners') property assets have increased substantially and that has allowed them to leverage off that," said Ennik.

"Property owners are wealthier as a result of the buoyancy and that is why interest rates are not having the effect they had historically when the market was not as buoyant."

Meanwhile, Sotheby's International Realty said SA's property prices were starting to catch, up with those in the "globe's most desirable locations".

Source: BusinessDay