Absa forecasts 7% drop in real term house price growth

According to the latest Absa House Price Indices, nominal year-on-year price growth in all three categories of housing (small, medium, and large houses) in the middle segment of the market slowed down further in August 2008. In real terms (i.e. after adjustment for inflation) prices dropped to levels last seen in early 2006.

The latest price trends Absa says are a result of deteriorating economic conditions (surging inflation, higher interest rates and slowing real household disposable income growth). These factors had a negative effect on the financial position of many households, which caused housing to become less affordable over a wide front.

The average nominal price of middle-segment housing, as measured by the bank, increased by a low 1,7% year-on-year in August 2008, down from a revised growth rate of 2,6% in July. The August growth rate was the lowest since January 1993, and brought the average nominal price of a house in this segment of the market to about R962 500. Against this background the risk of nominal year-on-year house price growth moving into negative territory, is increasing.

In real terms prices declined for the sixth consecutive month in July, by 9,6% year-on-year (-7,7% year-on-year in June), based on headline CPI inflation. This was the biggest real price drop since November 1992, when it was 9,8% year-on-year. On a month-on-month basis house prices were down in both nominal terms (-0,1% in August) and real terms (-2,1% in July).

Nominal price growth with regard to small houses (80m²-140m²) came in at 3,9% Year-on-year in August 2008 (4,8% year-on-year in July). This brought the average nominal price of small houses to about R682 500 in August (0,1% up on July). In real terms the average price of small houses dropped by 7,6% year-on-year in July after a decline of 5,7% year-on-year was registered in June. In July the average real price of a house prices in the small category was down by 2,0% compared with June.

The average nominal price of medium-sized houses (141m²-220m²) increased by 2,0% year-on-year in August this year (2,8% year-on-year in July), which brought the average price of housing in this segment of the market to around R946 200. Compared with July, nominal price growth of 0,2% was recorded. In real terms, the average price of medium-sized housing was down 9,3% year-on-year in July (-7,4% year-on-year in June). On a month-on-month basis, prices declined by a real 1,9% in July compared with June.

With regard to large houses (221m²-400m²), nominal price growth of only 1,1% year-on-year was recorded in August this year, down from 2,9% year-on-year in July. On a monthly basis, the average price of a large house was a nominal 0,5% lower in August than in July. This brought the average price of housing in this category to a level of about R1 368 000 in August. Taking account of the effect of inflation, the average price of large houses was 9,3% year-on-year lower in July (-6,5% year-on-year in June), while in comparison with June this year, prices were down by a real 2,6% in July.

These trends with regard to residential property prices are a clear indication of prevailing market conditions on the back developments on the macroeconomic front over the past two years, and the effect these factors had on the household sector in general.

Nominal price growth across all three categories of housing in the middle segment of the market is forecast by Absa to slow down further towards the end of 2008, with a growth rate of around 4,5% expected for the full year. In real terms house prices are set to drop by almost 7% this year, which will be the first annual real decline in house prices since 1999.

Absa expects the residential property market is expected to bottom in 2009, mainly as a result of declining inflation and interest rates during the course of next year. It is, however, only in 2010 that nominal price growth is expected to rise to a level of above 10% again, while real price growth is projected to turn positive in the same year after two years (2008 and 2009) of real price declines.

In view of these expectations, late 2008/early 2009 will probably be the best time to buy property.
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