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Wednesday Jan 08, 2014

Real property prices rise slightly after years of decline

The average house price increased by 6.8 percent last year over the average price for 2012, says the FNB House Price Index released on Monday.

This was a slight slowing in growth on the revised 2012 average house price growth of 7.1 percent, FNB household and property sector strategist Johan Loos said.

In real terms - when adjusting house prices for consumer price inflation - last year showed a 0.8 percent rise, compared to 1.3 percent in 2012.

Nevertheless, last year was the second in a row of slight positive real house price growth following four years of average real price decline.

The average price of homes transacted was R891 976 last year, compared with R835 480 in 2012.

In real terms, the index remained well above levels of a decade ago, with the real price average for last year 42.6 percent above the real average price for 2003. But compared with the last decade's real average price peak - reached in 2007 - last year's average real price was still 18.5 percent lower.

In nominal terms, last year's average price was 145.2 percent higher than the 2003 price level, but only 19.3 percent above the 2007 level.

Therefore, real price levels last year remained far above the levels of a decade ago, but still reflected a significant cumulative downward 'correction' since 2007, Loos said.

On the outlook for this year, he said FNB believed 'we shouldn't expect a large increase in the average rate of house price inflation on that of 2013'.

'We enter the new year not forecasting any interest rate cutting, and thus no further stimulus from the SA Reserve Bank either, as consumer inflation continues to move around the higher part of the three to six percent target range.'

However, while a slow economy and lack of interest rate cuts could be expected to have a moderating influence on the pace of growth in residential demand this year, two other key factors could possibly have the opposite influence.

'First, the question needs to be asked as to whether banks as a group are beginning to see mortgage lending as a potential source of asset growth after the unsecured credit boom has all but ended.

'Why not? 'Recency bias' in humans suggests that long periods of low and stable interest rates, and better times in recent years regarding bad debts on mortgage books, can often be expected to drive a perception of lower risk among lenders and borrowers alike.'

This could imply relaxations in lending criteria, something which might have been taking place already, and which in turn could be boosting residential demand.

National Credit Regulator data pointed to accelerating growth in mortgage lending in recent quarters, as well as cutbacks in other forms of credit granted.

Whereas total household credit granted in the third quarter of last year grew by a moderate 6.8 percent year-on-year, the mortgage component of that grew by a very strong 20 percent in value, and had been on a sharply accelerating growth trend in recent quarters.

The second key factor was the supply side of residential property.

This might also be currently supportive of higher house price growth despite a slowed economic and household disposable income growth rate.

Residential building activity had surprised on the downside last year.

The recorded number of residential units completed for the first 10 months of last year rose year-on-year by a mere 3.2 percent.

And the level of building activity remained not far above half of what it reached at the height of the residential building boom in 2007.

The net result was that despite a slowed economy last year, other factors, most notably some possibly more relaxed lending by banks as a group, and a constrained supply side of the residential property sector, 'lead us to lift our 2014 average house price growth forecast to nine percent', thus up from last year's growth.

'In 2015, we would expect price growth to once again slow, based on our forecast that interest rates could start to rise in 2015,' he said.



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