Slower growth predicted for South African property market

After two years of strong growth, the residential market in South Africa is set to lead global housing price increases by some estimates, although the rise in property values is expected to be slower than in previous years. However, the government’s recently announced budget could provide a general stimulus for the broader economy as well as some measures that more directly benefit the real estate market.

In early February, credit ratings agency Fitch issued a report on the residential property market in South Africa, saying that while broader indicators are encouraging, the pace at which prices in the sector would rise in 2014 would ease somewhat compared to the past two years.

“Fitch expects nominal housing appreciation to slow down to approximately 6% a year over the next few years, in line with inflation,” the report stated.

Though demand for properties at the upper end of the market should remain steady, slower growth in the overall economy points to more moderate price increases than have been observed in recent years, Fitch said.

Late in 2013, housing prices were rising by around 7.9% year-on-year according to South African mortgage originator, ooba. However, in a research note released in December, First National Bank (FNB) put the rate of increase at 6.5%, forecasting similar growth for 2014.

Placed in an international context, the outlook for 2014 is quite good. In its recent global report on housing prices and mortgages, Fitch predicted South Africa and Brazil would lead growth in the real estate market, with home prices expected to rise 6% this year, followed by the UK (5%), Australia (4%), Germany and Ireland (3%), and the US (2%).

Lenders also appear willing to extend credit for home purchases, significant at a time when banks in South Africa are generally pulling back on their loan activity. According to a late January report from Standard & Poor’s, local banks are likely to rein in credit to some segments, such as longer-term and larger unsecured loans, but overall lending activity is set to increase by as much as 8%, supported in part by residential mortgages.

Fitch made similar remarks, saying home loan performance had remained stable since 2011, following a spike in defaults in 2008 and 2009, with the agency forecasting little risk in the coming year.

Impact of interest rate hike

While credit seems likely to be available, the recent increase in interest rates could discourage some potential borrowers. In January, the South African Reserve Bank (SARB) raised its repo rate by 50 basis points to 5.5%, in an effort to curb inflation and shore up the rand, which lost nearly 25% of its value last year. According to one FNB analyst, commercial banks were quick to follow suit, lifting prime lending rates to around 9%.

Projections issued by SARB at the time of rate increase suggest this could be a challenging year for South Africa. Inflation is expected to hit 6.3% in 2014, above the central bank’s 3-6% target band, while SARB lowered its GDP growth forecast for the year, from 3% to 2.8%.

As Fitch and other analysts have pointed out, the combination of slower growth and higher inflation will erode domestic spending power and reduce capital availability for investment in the real estate market.

Budget boost

The 2014 budget, handed down by Finance Minister Pravin Gordhan on February 26, may ease some of those challenges, with increased spending and support for smaller businesses having the potential to stimulate growth, which could flow into the property market later in the year.

According to Andrew Golding, the CEO of the Pam Golding Property Group, though the budget did not contain any direct schemes or incentives to assist property buyers, it did contain a number of positive elements.

“New spatial plans for cities, upgrading informal settlements, increased social infrastructure and improved public transport, coupled with the announcement of 216,000 houses to be built, is positive news,” Golding said.

Increased spending on social infrastructure, such as education, health and community facilities, along with higher outlays on transport links and utilities as set out in the budget, can also have an impact on the real estate market. Improved services provide added value to properties, especially in outlying areas of major cities, with fast transport access coupled with inner city standard infrastructure helping to boost appeal and prices.

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