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News: SA luxury boom

Mon, 04 Jun 07

Luxury property in South Africa has more than doubled in value in the last seven years, the ABSA group has reported....

It found the 2000 first quarter average price of £130,400 had moved up to £277,700 by the end of the first quarter of 2007.

This represents a 113 per cent increase and an average growth rate of 11.8 per cent per annum in nominal terms, and 6.5 per cent in real terms after taking the effect of inflation into account.

ABSA’s figures are based on the total 2006 purchase price of houses valued between £190,000 and £700,000.  A spokesperson for ABSA said:

“During the past number of years house prices at the lower end and in the middle market segment were largely influenced by various cyclical and structural factors, especially the economic factors such as interest rates, inflation, growth in household income and the level of household debt

“However, the market for residential property at the upper end of the market appears to be influenced also by other factors.

“These factors may include political developments, property rights issues, legislation (capital gains tax, property rates and regulations pertaining to future housing developments), living trends (estate living), exchange rate movements, and the performance of other asset classes”.

Lower growth related to strong supply

Since the beginning of 2000 up to the first quarter of 2007, nominal price growth in the luxury market segment was much lower than in the middle market segment which averaged 19.6 per cent per annum.

‘The lower growth in house prices at the upper end of the market is related to a strong supply of properties in the market segment in recent years, whereas demand started to taper off in late 2004, mainly as a result of the high absolute prices caused by strong price growth in 2003 and 2004. However, it should be noted that growth in house prices in the luxury category has come off a relatively high base’.

In view of house price trends in the luxury category and interest rate movements since the middle of last year, the gross monthly household income required to qualify for a 100 per cent mortgage on a luxury house of £277,700 for which the monthly repayment does not exceed 30 per cent of income, was about £10,500 in the first quarter of 2007.

This was 22.5 per cent higher than a year ago, when a monthly gross household income of £8,600 was required to qualify for a 100 per cent mortgage on a £257,900.

A number of factors to consider

However, said ABSA, many affluent households might in the past have been able to negotiate a home loan at a lower interest rate than the variable mortgage rate:

‘In reality, this will cause the mortgage repayment and qualifying income in respect of luxury housing to be markedly lower’.

Although house price growth in the luxury segment has been well below that of some other segments, this category of the residential property market is influenced not only by factors such as economic growth but also inflation, interest rates and household income.

Source: Fly2let

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