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Debt levels will put the brakes on price growth

Home prices will rise in 2014 in the face of a growing shortage of stock, but increases will be tempered by affordability constraints, says Richard Gray, CEO of the Harcourts Real Estate group.
 
“A year ago, there was an oversupply of property, but this has largely been sold, especially in the metropolitan areas, and we are actually experiencing a shortage of homes to sell in many of the most popular suburbs,” he says.
 
“Demand is to a large extent being driven by the increasing number of first-time buyers coming into the market and freeing-up existing owners to upgrade or just move elsewhere. However, there has also been much activity in the past year at the upper end of the market, with high net worth individuals deciding that the time was right to acquire multimillion-rand properties before values really start to climb again.”
 
And, Gray says, the growing stock shortages will undoubtedly drive prices higher over the next 12 months, despite substantially increased activity on the part of developers.
 
“Building input costs are high and – according to Absa - it is currently about 37% more costly to build or buy a new home than it is to purchase a similar pre-owned home, so even when a developer does add new stock to a suburb, it is likely to be priced at more than the surrounding homes and so have no depressing effect on local prices.”
 
However, he says, Harcourts does expect sales, and thus price increases, to be constrained in the coming year by affordability issues. “The current low interest rate cycle is of course aiding affordability, and the financial institutions do appear to have an increasing appetite for mortgage lending.
 
“But household debts remain high, and this is limiting the ability of the banks to lend because existing debt commitments reduce the percentage of disposable income that prospective buyers have available to cover the monthly repayment on a home loan.
 
“And those buyers who cannot qualify for the home loans they want then either have to postpone their home ownership plans while they reduce their debts and save up a big enough deposit, or lower their sights and buy a cheaper property.
 
Meanwhile, Gray says, the banks have no desire to see new homeowners find themselves in a negative equity situation - as so many did following the 2009 recession and property price collapse – so they remain conservative in their property valuations when granting home loans, and this is also acting as a brake on price growth.”


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