House price inflation resumes

ABSA Housing Index – 4th November 2009

After almost a year of nominal year-on-year house price deflation in the South African housing market, some price inflation was recorded in the past two months, according to Absa’s calculations. Based on recent price trends, it was expected that annual nominal price growth would resume shortly. On the back of these developments as well as declining consumer price inflation in recent months, real price deflation slowed down further in September.

House prices in the middle-segment (see explanatory notes) were up by a nominal 2,6% year-on-year (y/y) to R991 200 in October 2009, after rising by a revised 1,3% y/y in September. Month-on-month price inflation came to 1,1% in October. In real terms, house prices in the middle segment of the market were down by 4,6% y/y in September (-6% y/y in August).

The average nominal price of small houses (80m²-140m²) were down by a nominal 3,1% y/y in October, compared with a decline of 3,6% y/y recorded in September after revision. This brought the average nominal price of small houses to about R657 200 in October. In real terms, the average price of houses in this segment was 9,2% y/y lower in September, after declining by a revised 9,8% y/y in August.

In the category of medium-sized houses (141m²-220m²), the average nominal price declined by 4,4% y/y in October (-4,5% y/y in September after revision), which brought prices in this segment to around R908 300. Taking account of inflation, this resulted in a real price decline of 10,1% y/y in September, unchanged from August.
Nominal price growth in respect of large houses (221m²-400m²) accelerated to 3,2% y/y in October this year, after increasing by a revised 2,6% y/y in the preceding month. This caused the average nominal price to rise to R1 417 400 in October.

The average price of large houses was down by a real 3,3% y/y in September, compared with a drop of 4,2% y/y in August. The latest trends with regard to house prices are encouraging, which are based on a further rise in transaction volumes in October, compared with September. This came after transaction volumes appear to have bottomed in August this year.

Despite massive job losses recorded in the third quarter of 2009, there are indications from various economic indicators, such as the South African Reserve Bank’s leading and coincident business cycle indicators, that the economy is on its way to recovery. Although the household sector is still very much under pressure on the back of declining employment, while real disposable income growth is negative territory, housing market conditions are expected to improve further towards the end of the year and into 2010. Better economic conditions, as well as banks’ less tight lending criteria and the lagged effect of lower interest rates, will provide much needed support to the property market during the course of the next twelve months.

Taking account of house price trends in the first ten months of 2009, nominal price deflation of less than 1,5% seems possible for the full year compared with 2008. Average nominal house price growth of up to 3% in 2010 is attainable if the latest trends prove to be sustainable. Real price deflation of around 8% is forecast for 2009, while prices may decline further in real terms next year on the back of nominal house price and inflation projections.