Residential Property Perspective - Second Quarter 2007 (In a nutshell)

Second Quarter 2007- In a nutshell

Focus article: Metropolitan and rural housing market developments

  • The housing market in South Africa experienced strong growth in metropolitan as well as rural areas since 2000, largely as a result of a range of demographic, economic and socio-economic factors.
  • Population growth was faster in the metropolitan areas than in the rural areas. This was mainly driven by the process of urbanisation.
  • Formal sector employment increased significantly in the metropolitan areas, with the average level of household income rising faster in the metropolitan areas than in the rural areas.
  • Although house prices have been higher in the metropolitan areas than in the rural areas over the years, housing in the rural areas is regarded as being less affordable than in the metropolitan areas, mainly as a result of lower and slower-growing household income in rural regions compared with the metropolitan regions.
  • As the affordability of housing has come under pressure in recent years in rural as well as metropolitan areas, the building and land areas of new housing have declined throughout the country.
  • Urban lifestyles, traffic congestion, technological progress and changing urban conditions have prompted people to change their living trends, with an increasing number of them also having moved to remote rural and coastal areas. These changes in lifestyle had a profound effect on property markets in both metropolitan and rural areas.

Recent house price trends

  • The average price of affordable housing increased by a nominal 18,1% yearon- year (y/y) in the first quarter of 2007 (11,8% y/y in real terms).
  • Nominal price growth of 15,2% was recorded in middle-segment housing in the first quarter the year, causing the average price of a house in this market segment to come to about R892 500. In real terms, house price growth came to 9,3% y/y in the first quarter.
  • In the luxury segment of the market, house prices increased by a nominal 7,6% y/y in the first quarter of 2007. The average price of houses in this category increased by a real 1,8% y/y in the first quarter.

Outlook

  • Inflation is currently under upward pressure on the back of volatility in international oil prices and the rand exchange rate, which caused domestic fuel prices to increase sharply in recent months. The drought conditions and devastating fires which recently occurred in some agricultural regions are expected to push food price inflation to higher levels in the near future.
  • In view of inflation expected to rise to higher levels in coming months, together with continued strong growth in domestic credit extension, an increasing household debt ratio and cost of servicing debt, and a substantial current account deficit, the risk for interest rates over the short term is on the upside.
  • Nominal house price growth is forecast to average 13,1% (7,2% in real terms) in 2007, compared with a growth rate of 15,3% (10,2% in real terms) recorded in 2006.

Courtesy Jacques du Toit Senior Economist ABSA Bank

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