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House prices rise in brief respite before 'bloodbath'
Property prices are set to fall in a delayed reaction to the recent financial turmoil, writes LUCIENNE FILD
BELIEVE it or not, but house prices rose in the past quarter, despite the higher interest rates and economic turmoil. Sadly, it's only a temporary joy for homeowners, say economists, as the full impact of the financial turmoil will send prices tumbling from this quarter onwards. And house prices could continue their fall to the middle of next year, they say.
The latest Absa Quarterly Housing Review shows the average price of houses countrywide rose by 12% - to R208 197 - in the year to September. In real terms, after taking into account inflation of almost 8%, this is an increase of 3.8%. On a regional comparison, house prices in some provinces enjoyed sharply higher gains during the year. The accompanying table shows the house price gains in the nine provinces and their major metropolitan areas. The Free State recorded the highest increase of 29%, followed by the Northern Cape with 22%, the Eastern Cape with 19%, and the Western Cape with 17% (all stated before inflation).
The province which suffered the lowest price rise in the past year was Northern Province with 9% - a slim increase over the 8% inflation rate. The average price increase in Gauteng was 11%, but Pretoria bucked the regional trend with house prices gaining 16% in value.
Unfortunately for homeowners on the West Rand in Gauteng, house prices rose by only 6% - the lowest countrywide - and a gain well below the inflation rate. Overall, houses in Cape Town sold for the highest average price of R243 856. Second were houses in Johannesburg at R242 630. The prices of small and medium houses increased by more than those of large houses over the year. But homeowners can't afford to rejoice at the increase in value of their houses. Christo Luus, Absa group economist, says the property market usually shows a delayed reaction to changes in the economic climate. This explains the higher than expected increase in house prices in the past quarter, against the backdrop of financial turmoil that saw a 40% drop in the stock market and sky-high mortgage bond rates. Mortgage bond rates shot to record levels as the prime lending rate increased by 7% since June, before dropping back 2% in the past three weeks. Higher interest rates dampen the affordability of new houses for consumers, and the subsequent reduced demand for houses results in falling market prices. The full impact of last quarter's economic and market turmoil on house prices will be felt only this quarter. Luus predicts there will be retrenchments, homeowners who have been hanging onto their houses will be forced to sell at lower prices, inflation could rise to 9% or 10%, and the overall financial situation of the average consumer will be less than rosy. In addition, the recent drop in interest rates is not expected to bring much relief to the market, adds Luus. The signs of a weakening residential property market began to filter through in the past quarter. The level of turnover in the residential property market declined sharply. Absa reports that in some areas mortgage bond applications shrunk by 60% in the third quarter, compared with the first quarter of this year. Neville Berkowitz, a Gauteng-based property economist, says house prices are facing a bloodbath. A decline in property values this quarter is certain, he says. House prices will fall even further during the first half of next year, says Berkowitz, when many homeowners start losing their houses through repossession. "Hopefully by the middle of next year interest rates will have dropped enough to soften the blow," he says. Another possible dampener on house prices is next year's general election. While it is generally accepted that the ANC will win the election, there are fears that if the ANC achieves a two-thirds majority, giving it the power to change the constitution, this will deal a severe blow to investor and homeowner confidence, and property prices could take yet another knock. Erwin Rode, a Cape Town-based property economist, says he was expecting a sharp decline in house prices to show through in the third quarter. Rode's view is that by the middle of next year, house prices will be between 10% and 20% below what they were in May this year. Upmarket properties will take the biggest fall in price since stock market turmoil always affects higher income homeowners more severely, says Rode. Lower income homeowners are affected largely by rising interest rates, and not so much by stock market turmoil, as their income is usually a fixed salary. In all, it seems to be a doom and gloom scenario for the residential property market. Unless, of course, you are a first-time buyer with cash in your pocket.
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