Losing a bit of momentum – 2005 Between 2001 and 2003, property prices increased between 5% and 10% annually, a growth rate ahead of the inflation rate. In 2004, however, prices shot up by 32.1%, making South Africa the number one hotspot worldwide for property value increases. By January 2005, however, pundits and forecasters were unanimously predicting that, while the boom might continue, a maximum of 20% for the year was all that could be expected.

Absa’s senior economist Jacques du Toit, opened the New Year by saying that the annual excess of 30% was unsustainable. Buyers were likely to experience serious affordability problems, he believed, if the trend was to continue. He did expect the boom to maintain momentum, however, as debt levels had receded substantially since 1998, and a strong demand for property was continuing form a growing middle class. Added to this, he pointed out, were other “favourable economic factors such as low inflation, strong economic growth and low interest rates” (Business Day, 6 January 2005).

By March the downward trend was already apparent. David Pincus commented, “The current declining trend can probably be ascribed to housing becoming less affordable due to sharp price increases.” Salary and wage increases were dropping back below 10%, and although prices were continuing to rise, stable interest rates were discouraging buyers. The one exception, Pincus pointed out, was the demand for stands to build new houses on, which, he added, appeared to be “insatiable” (The Star, 12 March 2005).

Three months into the New Year, Jacques du Toit stated that, although house price increases remained relatively strong, the surge was declining monthly. The Absa Quarterly Review showed that the overall increases for the period was 28%, still very high, but Du Toit again that prices could be expected to drop to an average of between 15% and 20% for the year. Also mentioning the reducing wage increases, he explained the affordability of housing would continue to be the main factor determining price growth in 2005 (The Citizen, 6 April 2005).

Running out of steam -2006 In June 2006, the first interest- rate hike shook the market. It was only 0.5%, leaving the prime rate at a relatively low 11%, but it braked the market severely, especially when it followed by a further 0.5% increase just two months later. The Reserve Bank justified the long-expected by pointing to increasing inflationary pressures in the economy, rising international oil prices, and the decreasing rand exchange rate. Du Toit projected at the time that house price growth, already down to 13.5%, could be expected to drop by 7% by December 2006. Lew Geffen summed up the general position: “But all this means that the boom is officially over and that the market has returned to normal levels, with values expected to grow by 9% to 12% a year – at which rate property will still deliver a healthy return on investment, especially if it is also your residence” (quoted by Monique Terrazas in “Agent magazine, September 2006).

At the end of 2006, Du Toit confirmed the annual slowdown, expecting to continue throughout 2007. He added, however, that in the second half of 2006 an upswing had been experienced in the small and medium-size housing arenas. He commented: “There has certainly been a shift of focus from large upmarket properties to more affordable housing – with affordability being the key in the face of rising interest rates” (Business Day, 8 December 2006). Although the market sustained a 13.7% average for the whole of 2006, contrary to Du Toit’s mid-year predictions, he again expected price rises to slow down in 2007 to an average of 8.5%.

FNB commercial’s property strategist, John Loos, agreed with Du Toit, adding that the downward trend was inevitable and would continue irrespective of rate increases and decreases. He expected a turn around in 2008: I’m an optimist – I believe that this will be the beginning of our next boom, and it’s going to be driven by SA’s continued solid economic growth that’s driving steady middle class and household income growth.” In particular, he expected housing in the R700 000 to R800 000 bracket to do well (Business Day, 8 December 2006).

In December 2006, Standard Bank’s residential property gauge also confirmed the overall impression that prices of properties in the lower end of the market were increasing more freely than those above the median national price which the bank gave as R540 000 in November. (This must include major low cost housing developments – South Africa’s real average house price in the normal residential market is closer to R850 000.) Buyer affordability is indeed proving to be a major factor in price increases. Chris Needham commented, “The boom is over for some, but money is still being made as the cheaper end of the market plays catch-up” (Sunday Times, 3 December 2006).

Quo vadis Has the downside finally bottomed out Current house prices are increasing at a moderate 8% per annum. The great boom is definitely over but prices are not expected to drop, nor is the annual price increase expected to decrease. Contrary to many predictions of austerity for property investors, some economists believe the next boom is just around the corner. At the recent property investment conference hosted by the investment property Databank and the South African Property Owners’ Association, John Loos painted a much rosier picture of what the future is likely to hold. Again confirming his expectation of a recovery in the market next year, he added that he anticipated interest rates to start decreasing again, even going below the lowest point reached in the past 25 years of 10.5%. Pointing back to a long slump in the construction industry during the 1980’s and 1990’s, he suggested that developers would continue to struggle to keep up with the demand for property the population increases, despite the boom in developments during the past five years. He particularly expected growth in property investments among the emerging black middle class to exceed the national GDP growth rate.

Loos went on to state that building cost inflation was likely to continue to push up the price of residential properties generally, adding that despite the slowdown in residential property prices since 2004, homeowners could expect the good times to continue. While the economy remains strong and maintains a forward momentum as it is doing, Loos believes that the property price will continue to grow, adding that the actual growth rate in the national economy is not as significant as its direction in stimulating investor confidence, “You ain’t seen nothing yet,” Loos said of those who already think property is already too expensive (The Star, 4 November 2006).

As long as local banks can afford to give 108% loans (covering the total purchase price of a home plus transfer costs), and as long as average South African income earners can afford to take them, property prices are likely to continue to rise.

The 2004 boom, in hindsight, was inevitable. Local house prices have been depressed for years and every home bought in the country before 2003, irrespective of its price or locality, was a bargain.

The market merely caught up and current prices should be regarded as normative rather than excessive. In many ways, particularly in comparison with other world markets, local properties are still under-priced and the present quiet may only be a lull before the storm breaks.