Address at Rode Conference by Dr Andrew Golding

Despite the current slowdown, South Africa's residential property market remains resilient and compares well with key foreign markets, said Dr Andrew Golding, CE of the Pam Golding Property group, who was addressing delegates at the Rode Conference held in Cape Town and Johannesburg (11, 14 August 2008). Dr Golding delivered a presentation entitled: "What on Earth is happening in the Residential Market?"

"Based on statistics provided by Knight Frank, for the first quarter of 2008 South Africa experienced growth of 8.8 percent in house prices compared with the same period in 2007 - the latter seeing us achieve 13.6 percent growth. This puts South Africa in the top 10 countries rated over the period, just behind Russia, Australia and China but significantly ahead of countries such as the UK, United States, Japan and Germany.

"From a local perspective it's hardly surprising that South African consumers are feeling the pinch, given a host of factors which include rising inflation and interest rates, the introduction of the National Credit Act, Eskom's supply constraints, political uncertainty - including the current Zimbabwe situation, and confusion over possible changes in legislation on expropriation, land restitution and foreign ownership. These are coupled with rising household debt as well as declining consumer confidence.

"As a result the volume of sales transactions in the residential property market has decreased by some 30 percent over the past year and by as much as 50 percent in some areas, which is much in line with global trends. However, we are still feeling the full effects of the rate hikes take effect, with the NCA bedding in, and as a result house prices are expected to experience further pressure.

"According to Lightstone, while most market segments - whether geographic or value based - have been showing stress for some time now, previously stronger performing segments are now correcting sharply. The affordable housing market (average prices below R250 000) has seen annual growth drop from 35 percent in the first quarter of 2007 to 21 percent in March 2008; similarly the mid-value (R250 000-R700 000) market has dropped from 19 percent to nine percent over the same period.

"Affordable housing areas have in fact been propping up the overall national index, having outperformed the high end areas for some time. As of late however, a steady convergence of the various price segments appears to be taking place with further convergence anticipated for the remainder of this year.

"Further interesting statistics from ABSA include the fact that in the lower market below R400 000, year on year growth has slowed to the extent that the average price is down to R283 000 - the lowest since September 2003. While in the middle housing segment below R2.9 million, year on year growth is down to the lowest year on year growth in this segment since the third quarter of 1999. In the luxury segment between R2.9 million and R10 million nominal growth in house prices has been in single digits since the first quarter of 2007, while prices are declining in real terms for the past three quarters, also reflecting the effect of the economic cycle on this category of housing. The one exception to this downward trend has been the very top end market - 'uber-prime', which is a sector of the market driven by national and international multimillionaires, which so far has escaped the downturn. Demand in this sector remains high for scarce, but highly exceptional, properties.

"In addition, after strong growth during the boom period - reaching inflation highs of nearly 45 percent year on year - coastal property ie within 500m of the coastline, has dipped below inland property. This 'coastal belt' contains a high proportion of leisure and/or investment properties and is consequently far more sensitive to economic cycles. As for the municipal indices, the coastal provinces have exhibited far more volatility than their inland peers after a strong performance from KwaZulu-Natal and the Eastern Cape - the latter achieving the highest growth rates during the boom period but with growth slowing now. Gauteng, with its high proportion of primary residences, continues to maintain a steady performance, while Cape Town appears to be holding growth at current levels.

"While unsurprisingly, the Gauteng metro areas track the national index, Ekurhuleni has been the strongest of the inland metropoles with the highest growth since 2000, outperforming Johannesburg and Tshwane in 2004 and 2005. While house price inflation for the three metros has converged to about six percent nominal, the Ekurhuleni index remains above Johannesburg and Tshwane.

"Freehold property has also outperformed sectional title in recent times (since January 2000). While historically, sectional title property under-performed freehold property - especially in lower end areas where sectional title makes rejuvenation difficult - recently the sectional title index appears to be closing the gap and perhaps this is due to the increased 'value' of security as a result of a focus on crime over the past year. It is also likely that densification in major metro areas may result in an increase in relative demand for sectional title properties.

"On a positive note, we see also from Lightstone statistics that while net yields on rental property across all price segments remain generally low, in May 2008 compared with January 2008 we see increases in rental yields starting to occur. And it is also hoped that interest rates have finally peaked, which would contribute positively and significantly towards consumer confidence in general and alleviate pressure on house prices," said Dr Golding.

For further information contact Dr Andrew Golding on 021 7101700.

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