A Cooling Housing Market

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The fast profits of the past few years may be a thing of the past, as South Africa's housing market begins to show signs of cooling down, due to rising interest rates and the slowing of nominal house price growth.



In October, the nominal house price growth - economic growth including inflation - was recorded at 12.7% year-on-year.



Absa Bank researchers have indicated the average house price in South Africa in the middle segment of the market was $115,000 in October.



Absa bases their index on the total purchase price of houses in the 80 sq metre to 400-square-metre category, valued at R2.6m ($365,262) or less in 2006 (including home improvements), in respect of which loan applications were approved by Absa. Prices in the index are calibrated in an attempt to exclude the distorting effect of seasonal factors.



Andrew Golding, CEO of the Pam Golding Property Group, told OBG that the "residential market has calmed down from the frenetic growth of 2003-2005".



For 2006, nominal house-price growth is estimated to be between 12% and 13%, compared with the rate of 22.9% recorded in 2005. Price growth rates are expected to slow down further in 2007, predicted at around 6% for the year.



Wilfred Robinson, CEO of Acc-Ross Holdings, told OBG that he "would prefer to see real property value growth rates between 10% to 12%, because property growth rates at 26% are unsustainable and will eventually lead to a bubble and ensuing negative growth rates."



Inflationary pressures coupled with mitigating factors such as the large current-account deficit and continued strong growth in domestic credit extension with increasing levels of consumer demand have created CPIX inflation forecasts to move towards the 6% level by end-2006 and early 2007, and it is highly anticipated that interest rates will go up by the end of the year.



The Reserve Bank's monetary policy committee (MPC) will hold a meeting this month when it is expected to raise interest rates once again. Golding went on to say that "further interest rate increases in February and even April would be an attempt by the Reserve Bank governor to dampen consumer spending and credit demand, which so far has not taken place."



John Loos, a property strategist at First National Bank, believes that the housing slump in the US could also adversely affect the South African market. Loos believes that as South Africa continues to integrate itself with the global economy, the local property cycle will gradually fall "in sync" with major economy property cycles. He is quick to point out that this probably is a minor factor accounting for South Africa residential market cool down.



Meanwhile, a local business magazine has indicated that township markets were outperforming the metropolitan markets. According to their market researchers, it takes less time to sell a township property and the likelihood of receiving the asking price is higher.

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