Absa –Outlook for residential property

South Africa’s CPIX inflation increased further in the third quarter of the year on the back of volatile international oil prices, a weaker rand exchange rate, and higher food price inflation, according to Absa’s Residential Property Perspective : Fourth Quarter 2006 released today.

CPIX inflation is projected to rise further to above 6% by year-end. The deficit on the current account of the balance of payments remained above 6% of GDP in the second quarter of 2006, which contributed to the rand depreciating significantly against the major international currencies in recent times. Year-on-year private sector credit extension remained high, with mortgage advances growth at around 30% over the past few months compared with a year ago.

Against this background, Absa forecasts interest rates to rise further, by 50 basis points at each of the Monetary Policy Committee meetings in December this year, and in February and April next year. This will bring the prime interest rate and the variable mortgage interest rate to 12,5% at year-end and 13,5% by mid-2007.

As a result of these expectations, house prices are projected to increase by 13,7% y/y in nominal terms in 2006, taking into account the price growth of 14,9% on average recorded in the first three quarters of the year.

Nominal house price growth of 5,9% is expected for 2007, with prices declining by 1,9% in real terms next year. This will be the first real decline in house prices since 1999.
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