News: SA succumbs to inflationary pressures

Wed, 14 Nov 07

South Africa house price growth has plummeted to six year low...

Growth in house prices in the middle-segment of the market declined to a nominal 13,6% year-on-year (y/y) in October 2007— the lowest price growth since May 2001, when it was also 13,6%. This is according to the latest Absa House Price Index, which indicates that the average price of a house was about R957 700 in October.

Nominal price growth of 14.4% y/y was recorded in September this year. In the first ten months of the year, nominal house price growth averaged 15.1% compared with the same period last year.

MPC fighting back

Real year-on-year price growth came to 6.8% y/y in September (7.7% in August). In the first nine months of 2007, real growth in house prices averaged 8.2% y/y. The real growth rate is based on the headline consumer price index (CPI).On a month-on-month basis, nominal house price growth slowed to 0.6% in October from 0.7% in September. In real terms, house prices were unchanged in September compared with August.

Strong inflationary pressures are present in the economy, with the result that CPIX inflation (headline consumer price inflation, excluding mortgage interest rates) is forecast to peak at a level of more than 7% in the first quarter of next year. The Reserve Bank has on more than one occasion in the recent past voiced its concern about the outlook for inflation over the short to medium term. At its October meeting, the Monetary Policy Committee (MPC) stated in no uncertain terms that they are “determined to ensure that inflation returns within the target range”.

In view of the abovementioned trends in inflation, the Reserve Bank’s determination to bring CPIX inflation back within the 3%-6% target range, and rising oil and food prices, the risk of a further 50 basis point hike in interest rates at the December MPC meeting has increased.

Gradual declining trend

The nominal growth in house prices is expected to taper off further towards the end of the year, with average

growth for the full year projected at 14.5%. Taking account of the gradual declining trend in both year-on-year and month-on-month house price growth in recent months, price growth of just above 11% may be recorded in December 2007 compared with the same month a year ago.

Nominal house price growth is forecast to drop below 10% in 2008, largely driven by the tightening of monetary policy since mid-2006, as well as a slower pace of economic expansion, lower real household disposable income growth, and the impact of the National Credit Act.

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