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Sep 21, 2010


South Africa - House price rises slowing


 

The average value of all houses in South Africa increased 7.1% over the year to August 2010, according to ABSA.  But this is a deceleration, from the 9.4% price rises seen during the year to July. 

Mid-sized dwellings prices actually lost ground during the last quarter, i.e., since May 2010.  In August, the average price of medium-sized houses stood at R961,700; up 5.42% (2.85% inflation-adjusted) from a year earlier - but 1.69% down on the quarter.

South Africa enjoyed astonishing house price increases during the years 2000 to 2007.  Then, affected by the global financial crisis, the boom ended in Q1 2008. House prices were quick to recover. Low interest rates contributed, as the Reserve Bank cut rates twelve times beginning in December 2008, to 6% in September 2009.  By early 2010 house prices were surging again, encouraged by South Africa hosting the World Cup. Property price growth has since slowed, together with the waning of football fever.

The South African economy remains healthy, recording growth of 3% year-on year to Q2 2010. However, the old problem of high unemployment continues to pose a challenge. The unemployment rate was 25.3% in June 2010.

Fundamentals at work

Four main forces have been driving South African house prices up. The first was emergence of a financially stable black middle class. Since the end of Apartheid, blacks have found new opportunities and new financial strength. This development has had a tremendous impact on housing demand and the economy.

The strong growth of households’ real disposable income was somewhat encouraged by tax reliefs for individuals, in the context of a strongly growing economy. Average real GDP growth was 4% from 2000 to 2006, with real disposable income rising by an average of 4.7% over the same period.

In 2006, the CGT exemption on a primary residence was raised from ZAR1 million (US$127,129) to ZAR1.5million (US$190,694). Transfer duties on properties have been lowered too.  For example, no transfer duty is payable on properties valued at ZAR500, 000 (US$63,565) or less.

The second factor was that South Africans who had parked money offshore during the Apartheid era were allowed (and required) to bring it back by September 2004. Much of this money has gone into property.

Better stability and security have helped. During Apartheid and its sequel, property prices badly lagged the economy, as the security situation went from bad to worse. Now the country seems back on track. This feeling was reflected in rising business confidence indicators, and in the significant strengthening of the South African rand.

Lastly, the Financial Sector Charter in 2003 boosted mortgage loan growth. Financial institutions committed to provide ZAR 42 billion (US$ 5.45 million) of housing finance to the low income market.

From ZAR 332 billion (US$ 43.1 million) in 2003, the value of total mortgage extended to the domestic private sector has grown to ZAR 853 billion (US$ 110.8 million) in 2007.

Housing market slowdown

The recent slowdown of house price growth can be attributed to two factors - namely, the full implementation of the National Credit Act, and interest rate hikes.

The National Credit Act aims to protect borrowers from over-indebtedness. It requires lenders to disclose every term in the contract.  It also limits the amount of funds that can be borrowed. Furthermore, the Act gives the borrowers the right to request their credit report, and to challenge the report if there are inaccuracies. Lastly, the law requires every lender to assess borrowers’ credit-worthiness. The act has tended to reduce the supply of mortgage loans.

In line with global trends, surging oil and food prices have led to increased inflationary pressures since 2006, with inflation reaching 11.1% in April 2008.  This is higher than the inflation rate in previous years - 7.1% in 2007 and 4.7% in 2006.

Interest rate hikes were implemented to quell inflationary pressure. Mortgage rates on new loans have risen to 15% in May 2008 from its historical low of 10.5%, in effect from May 2005 to May 2006. Concurrently, the growth of mortgage advances has slowed. From an annual average growth of 30% in April of 2006, annual mortgage loan growth has fallen to 22% in April 2008.

  





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