Absa – Forecasting 5 to 10% house price growth in 2006

Higher international oil prices during the course of the past quarter caused domestic fuel prices to increase to all-time highs. These developments started to put upward pressure
on inflation in recent months.

Against this background, the Reserve Bank is not expected to cut interest rates further in 2005. This expectation is based mainly on the possible negative inflationary impact of these oil and fuel price trends in the second half of the year.

CPIX inflation is forecast to increase to an average of 5,6% in 2006 from an expected 4,3% in 2005. In an attempt to keep CPIX inflation within the target range of 3% to 6%,
a moderate increase in interest rates of up to 100 basis points in total is projected for next year.

Against the background of nominal growth in house prices of 24,3% y/y in the first nine months of 2005, Absa is forecasting in its third quarter review house price growth of around 21% seems likely for the year as a whole, compared with growth of more than 32% in 2004.

In view of expected higher interest rates in 2006, the current declining trend in nominal house price growth is forecast to continue into next year, with the affordability of housing, especially for first-time and low- to middle-income buyers, remaining an important factor over the next 12 to 18 months. As a result, single-digit house price growth of between 5% and 10% is projected for 2006.
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