Expected UK property market slump shouldn’t affect SA

UK experts this week warned that their housing market is heading for a fall in 2008 due to worsening conditions - property prices have soared to their most overvalued levels in more than 15 years, while the economy is in the grip of an interest rate tightening cycle that has seen average mortgage rates reach 7%, and disposable income growth has slowed to its slowest pace in 25 years. What are the implications for the SA market?

According to Barak Geffen, Executive Director of Sotheby's International Realty South Africa, the South African property market is not likely to follow in the steps of the UK, as the disposable income-to-house price ratio among SA’s new middle class will keep the local market well above water.

“Disposable incomes in the UK rose at the slowest rate in 25 years during 2006, reports London’s Telegraph newspaper. Affordability issues in the UK stem from the fact that house prices have risen sharply over the last few years and salaries haven’t kept up.

“As a result”, Geffen says, “unaffordability is reaching the worst level since the end of the last major housing crash in the UK. The Daily Telegraph/Lombard Street Research Housing Affordability Index has dropped by 7% over the past year and now stands at 91.2 points, the lowest level since 1991.”

“Although economists have been warning of a potential market correction for a few years now, the odds of a correction are now rising sharply because of the tightening in interest rates to their highest levels in six years.”

By contrast, Geffen points out, in South Africa disposable incomes, particularly for the middle class, continue to grow strongly. “Although household debt levels as a percentage of income have risen to 73% - a record high – the portion of that debt that has to be repaid on a monthly basis, when compared with income, is still relatively low.

“People are still repaying less on a monthly basis than they were in the past due to much lower interest rates and longer repayment periods. Mortgage debt as a percentage of disposable income remains fairly low at 40%, compared with 105% in the UK and 120% in Australia.”

At the same time, he says, most property economists believe that the local property market will be well-supported over the medium-term as demand continues to outpace supply. “With the economy growing at 5% and many people moving up into the middle class, demand for housing should be strongly underpinned going forward. Meanwhile, a lack of land and overwhelmed construction industry will be limiting supply.”

Combined with a relatively benign interest rate environment, local house price growth is expected to remain in the double-digits through 2010, Geffen points out. “And let’s not forget that SA property is still undervalued compared to international markets, despite the rapid growth we’ve seen. All of these factors point to the conclusion that the SA market shouldn’t follow in the footsteps of the UK.”

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