Absa - House prices growth slows in third quarter

The residential property market has been slowing down since late last year, taking into account trends in house price growth as well as indicators such as the number of days
properties are on the market before being sold and the gap between asking and selling prices.

These developments, Absa notes in its Residential Property Perspective for the Fourth Quarter 2005, have been evident across all segments of the market (affordable, middle segment, and luxury housing) and in all regions (provinces and metropolitan areas) during the course of 2005 up to the third quarter of the year.

The current phase of slowing down in the property market is occurring without any interference by the monetary authorities (such as higher interest rates) in an attempt to cool off and stabilise the market. The abovementioned trends and developments in the property market are not an indication of a bubble bursting, but are regarded as a quite normal manifestation of the forces of demand and supply at work in a free market environment.

The relationship between the demand for and supply of housing is largely driven by cyclical economic factors (e.g. economic growth, interest rates and household income) as well as structural factors (e.g. a rapidly growing middle class, an increasing scarcity of land for residential development, especially in the metropolitan areas, and lifestyle changes).

The change in the affordability of housing, against the background of trends in house prices, interest rates and household income during recent years, is regarded as the
single most important reason for the current slowdown in the residential property market.

Middle-segment housing

In the third quarter of 2005, the average price of houses in the so-called middle segment of the market (houses of 80m²-400m² and priced at up to R2,2 million) increased by 19,6% y/y to about R712 100 in nominal terms (up 24,8% y/y in the second quarter). This was the first time since the first quarter of 2003 that nominal y/y house price growth dipped below the 20% level. In real terms (after adjustment for inflation), house prices increased by 15,3% y/y in the third quarter, compared with a growth rate of 21% y/y in the second quarter of the year. During the first three quarters of 2005, nominal house price growth came to 24,3% y/y, whereas real growth of 20,4% y/y was recorded during this period.

The average y/y price growth of houses in the various categories of the middle segment was as follows in the third quarter of 2005:

* Small houses (80m²-140m²): nominal 15,1% and real 11% higher.
* Medium houses (141m²-220m²): nominal 20,9% and real 16,6% higher.
* Large houses (221m²-400m²): nominal 23% and real 18,6% higher.

Affordable housing

In the third quarter of 2005, the average price of houses in this category (houses of 40m2-79m2 and priced at R193 000 or less) increased by 15,8% y/y to about R145 200 in
nominal terms compared with growth of 17,5% y/y in the preceding quarter. In real terms, this represents an increase of 11,6% y/y in the third quarter of this year and 13,8% in the second quarter.

House price growth in the affordable market segment continued its downward trend, with both nominal and real year-on-year growth declining further in the third quarter of the year. Pressure on the affordability of housing is probably also having an impact in this market segment.

Luxury housing

After peaking at 22,9% y/y in the second quarter of 2004, there was a declining trend in nominal house price growth in the luxury segment of the market (houses valued at between R2,2 million and R8,2 million) up to the second quarter of 2005, when it reached a level of 5% y/y.

In the third quarter of the year, price growth levelled out at 4,9% y/y. In real terms, this came to growth of 1,2% y/y in the third quarter compared with 1,8% y/y in the second quarter.

Prices at the upper end of the market largely stabilised at between R3,22 million and R3,35 million during the first nine months of the year. This stabilisation in prices can be related to a strong supply of properties in this market segment during the past two years. Affordability probably also started to play a role in demand tapering off in recent times.

Regional house prices

On a provincial basis, nominal year-on-year growth in house prices in the middle segment of the market varied from 12,7% in North West to 39,5% in Limpopo.

At a provincial level, the performance of house prices, and the property market in general, is to a large extent related to factors such as regional economic structures (e.g. sectoral trends, developments and growth), living standards and conditions (e.g. household income and poverty) and the physical location of properties (coastal, inland, rural and metropolitan areas).

A combination of these factors probably played an important role in the divergence of house price growth between the provinces in the past quarter.

In the major metropolitan areas, nominal house price growth in the third quarter of this year varied from 16,9% y/y in the Durban metropolitan area to 25,9% in Bloemfontein.

Apart from the abovementioned regional factors, which also impact on property markets in metropolitan areas, a factor such as the scarcity of suitable and properly serviced land for residential development purposes also became increasingly important in the popular urban areas.
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