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News: SA price surge predicted

Wed, 12 Sep 07

Prospects for the SA property market remain positive, with prices set to double in the second half of this decade, according to FNB’s property strategist John Loos...

This is far off the 212 percent increase recorded in the first half of the decade, but still substantial in world terms.

The lowest point of appreciation in his extensive economic overview was for late this year/early-2008, overshadowed by interest rate increases, bottoming at around 10% year-on-year.

Clearly much depends on interest rate movements, but given the current inflation situation he expects little more than one further 50 basis point increase this year, implying that the interest rate cycle is near its peak. Furthermore, after a mild slowdown this year, he expects an economic upturn starting next year.

In addition, while interest rates form an integral part of his overview, he emphasised that unlike in the past, today’s property market was far less at risk of interest rate volatility, due to a change in the South African Reserve Bank’s approach to interest rates since the 1990s.

Positive structural changes

In the absence of large interest rate moves, the current market was being primarily driven by relatively strong economic growth, which he believed was on track to record at least a 4.5 percent growth rate in the current year before strengthening next year.

Positive structural changes resulting from democracy and the end of isolation and restrictive laws for many, were largely responsible for increasing long term economic growth momentum, and this is the reason why the current economic slowdown should only be mild.

More rapid long-term economic growth was in turn driving strong demand growth for housing. The solid growth was aiding a steady emergence of a black middle class. Another positive for the residential market was the Reserve Bank’s far more stable interest rate policy.

Their strategy of moderation with interest rate adjustments meant that homebuyers were now far less concerned over interest rates volatility associated with the past, which had bolstered their confidence to borrow far more aggressively.

Construction boom

Another long-term positive for the housing market cited by the economist was the current construction boom. This was creating rising pressure on the building costs through creating shortages of both building materials and skills, resulting in an inevitable knock-on effect on the delivery of new houses. The pressure on the supply side was expected by Loos to continue for “some years.”

The delivery of capital projects, which in terms of real government funding were still below 1976 peak levels in spite of the economy having doubled in size since then, would also seriously test the building and construction industries skills and exert further substantial pressure on building materials supply.

The combination of ongoing solid demand growth on the one hand, and supply constraints on the other, in his view, were highly positive for the long-term future house price growth. The possibility of house prices again doubling in the second half of this decade he noted would be viewed with horror by many people, but the grim reality was that South Africa’s house prices were still dirt cheap compared to many other countries.

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