Upward trend in South African house price growth continues

Middle-segment home values in South Africa increased further in May 2010 according to Absa Group Ltd., the country’s biggest mortgage lender.

The average nominal value of small, medium and large houses for which Absa approved mortgage finance, was up by a weighted 15,2% year-on-year (y/y) in May this year, resulting in an average house price of about R1,081,400 (US$139,000) in the middle segment.

Revised nominal price growth of 14% y/y was recorded in April.

The average real value of homes in the middle segment of the market, i.e. after adjustment for the effect of inflation, was up by 8,8% y/y in April compared with a growth rate of 6,7% y/y in March.

Base effects have contributed to these growth trends as house prices were declining on a year-on-year basis in all three categories of housing 12 months ago in nominal as well as in real terms.

Small houses

The average nominal value of small houses (80m²-140m²) posted some further strong growth of 29,2% y/y in May 2010 after rising by a revised 24,4% y/y in April. This brought the average nominal price of homes in this category to about R843,700 ($108,000) in May. In real terms the average real value was up by 18,7% y/y in April, after rising by 12,9% y/y in March.

The continued strong growth in the average value of smaller and more affordable housing is believed to be related to affordability issues. After a marked improvement in the affordability of housing over the past two years on the back of house price and interest rate trends during this period, housing affordability appeared to have turned around in late 2009. This is based on a slight increase in the ratios of house prices and mortgage repayments on new loans to household disposable income in the fourth quarter of last year, while rising property rates and taxes as well as electricity and water tariff hikes are impacting on the cost and affordability of running a property.

Medium-sized houses

The average nominal value of medium-sized houses (141m²-220m²) increased by 9% y/y in May, after rising by a revised 7,2% y/y in April. This brought the average price of a home in this segment to around R998,600 ($128,000) in May.

The average real value of medium-sized houses was up by 2,3% y/y in April, after rising by 0,3% y/y in March.

Large houses

In the category of large houses (221m²-400m²), the average nominal value was up by 6,4% y/y in May, which was marginally down on the revised growth rate of 6,5% y/y registered in April. Base effects have probably caused the May figure to be slightly lower compared with April, as year-on-year price deflation in the large segment was slowing down rapidly between April and June last year before price growth resumed again in July. The average nominal value of a large house was about R1,464,900 ($188,000) in May this year. In real terms the average value of a home in the large segment was up by 1,6% y/y in April, after rising by 0,9% y/y in March.

Consumer price inflation (CPI) dropped below 5% in April this year, with double-digit wage increases and administered price inflation posing some upside risks to headline CPI over the medium term. Against this background, interest rates are forecast to be kept unchanged at current levels until the first half of 2011, when a rate hike can expected as a result of gradually rising consumer price inflation.

After bottoming around mid-2009, house prices have picked up markedly on the back of the economic recovery, low interest rates and banks’ selective relaxation of lending criteria in respect of mortgage finance. However, year-on-year house price growth may taper off somewhat in the second half of the year due to base effects, with house prices deflating in the first half of 2009 and price growth resuming again on an annual basis from around August last year.