Analysts divided on property price outlook

House prices are showing early signs of recovery after falling for at least a year. And mortgage rates are at or close to their bottom. But aspiring homeowners, who hope to take advantage of the turn in the property cycle, have a lot of sums to do.

The first problem is that economists are divided on the outlook. Standard Bank economist Johan Botha expects house prices to rise between 3 percent and 5 percent this year. Absa property analyst Jacques du Toit expects even stronger growth of 6 percent to 7 percent and predicts the rate of growth will reach double digits by 2012.

But property economist Erwin Rode thinks the outlook for residential property is poor and will remain so for the next five years. Du Toit cites low interest rates currently and an improvement in household income later in the year. Rode says house prices are still unrealistically high, even after the recent falls, after the economy moved into recession at the end of 2008.

"Annual average compound growth in house prices of 20 percent for most of the decade outstripped income growth," he said. For that reason he sees "negative real capital growth" ahead. In other words, overall inflation will rise faster than house prices.

Rode argues that expectations about capital growth are "crucial" to the decision whether to buy or rent because house rentals are now about half the monthly mortgage repayment for the same accommodation. The implication is that landlords have been forced to adjust to current realities while home sellers are still living in the past.

Rode says it could pay a homeowner to sell and put the proceeds into property funds invested in industrial and commercial property - other than shopping centres, which will show "pedestrian" growth. "The risk is that the residential property market suddenly takes off," he concedes.

John Loos, a strategist at First National Bank, does not agree with Rode that homes are unaffordable. He says the price:income ratio is "more or less at a 39-year average".

He argues that house prices in the late 1990s were "grossly undervalued", and that the boom was "to a large extent a "normalisation".

However, he has only "moderate expectations for the property market over the next three years, at least". He believes the world is facing a second leg to the recession in 2011. "And, of course, huge rate and tariff increases relating to property also pose a threat to property price levels."

People who do enter the housing market have to decide whether to take out a mortgage at the current rate of about 10.5 percent - depending on the deal negotiated with a bank - or to get a fixed-rate loan.

What each bank offers depends on a number of factors, including the credit standing of the borrower, the length of the term, the size of the loan and the size of the deposit.

Benchmark mortgage rates, which have been on hold since August, may still fall further this year, and are likely to stay low for some time. However, rates will turn as the economy recovers so the benefits of a fixed rate will be felt in future.

Business Report

Posted at 09:21AM Feb 04, 2010 by Editor in Residential  |  Comments[2]