House prices set to grow by 4% in 2013

05 Dec 2012

The FNB House Price Index for November 2012 showed further slowing in its year-on-year (y/y) inflation rate from a revised 2.5 percent in October to 0.5 percent.

According to FNB, economic indicators make it difficult to see much improvement in housing market conditions in 2013 and expectations are that overall house price growth will be a little slower in 2013 than the average for the entire 2012.

Writing in the report, FNB household and property sector strategist John Loos says this is the eighth consecutive month of tapering growth since the relatively impressive 8.4 percent peak in y/y growth reached in March 2012.

The average value of homes transacted in the FNB House Price Index was R819 733 in November.

“This slowing y/y house price growth to levels back below consumer price inflation implies a return to declining house prices in inflation-adjusted real terms,” says Loos.

Loos explains that as at October the combination of a CPI inflation rate of 5.6 percent y/y and a 2.5 percent nominal house price growth rate in that month, translated into a real y/y decline of -3 percent in the FNB House Price Index.

“We believe that 2013 will see y/y house price growth a few percentage points higher than this most recent November 2012 level.”

According to FNB, economic indicators make it difficult to see much improvement in housing market conditions in 2013 and expectations are that overall house price growth will be a little slower in 2013 than the average for the entire 2012.

“This is based on our view of the global and domestic economy, as well as on the level of household sector indebtedness,” points out Loos.

He says the average house price growth for 2012 is projected at 5.6 percent.

Loos notes that real disposable income growth has broadly slowed, since the very strong rates of near to 6 percent in 2010/early-2011, down to 3.5 percent by Q2 2012, thus curbing growth in purchasing power of households.

Loos explains that this accelerating household credit growth is driven by very strong growth in the non-mortgage credit components and is the cause of a resumption of an unhealthy rise in the debt-to-disposable income ratio for the household sector.

“Strong growth in non-mortgage credit could increasingly constrain the household sector’s ability to purchase property going forward.”

The bank says in 2013, we will see a mild rise in consumer price inflation rate, while municipal rates and taxes continue to pose a problem for many homeowners and Eskom prepares the next round of multi-year tariff hikes.

“2013 will see low average house price growth of around 4 percent,” says Loos.

Botha says only 21 percent of the home loans now being granted are for 100 percent of the purchase price, and those who obtain them usually have to agree to pay a premium interest rate as high as three or four percent above prime – which is not affordable for many and adds substantially to the ultimate cost of the property.

On the November house price report, Loos says estate agents report that while there has been improvement in home demand as seen in 8 percent y/y growth earlier this year, they also point to a market that is yet realistically priced or under supplied on a national average basis.

This means that as soon as there is an absence of any new stimulus, price growth very quickly slows back to low rates, he says.

According to the FNB House Price Index, the peak of real house price levels at the end of the most recent boom was in February 2008.

From that month up until October 2012, the cumulative real house price decline was -18.9 percent.

While this appears to be a significant downward correction, the real price level remains +58 percent higher than July 2000 and in nominal terms, since February 2008 the cumulative increase up until November 2012 was a very mild +7 percent, although still a massive +213.2 percent up on June 2000.

The BetterBond statistics show that the average home price currently being paid by all buyers is R916 000, compared to R834 000 in November 2011, with the average deposit required being 18 percent of purchase price.

BetterBond reports a substantial decline in affordability for would-be first-time home buyers as house prices rise despite a cut in interest rates in July.

According to Rudi Botha, chief executive officer of BetterBond, the average home price being paid by first-time buyers has risen R145 000 in the past 12 months, and the average home loan repayment by almost R1 000 a month.

“This represents a substantial decline in affordability for such buyers and indicates that the window of opportunity for them to become homeowners is closing,” says Botha.

The statistics show that the average percentage of purchase price required by first-time buyers as a deposit has remained at around 12 percent for the past year but since the average price has risen, so has the actual rand amount of the deposit, which now stands at some R81 000 compared to R64 000 in November 2011, according to Botha.

He says for first-time buyers looking to enter the property market, they require a household income of around R17 000 a month compared to around R14 000 in 2011.

Botha points out that the overall level of mortgage lending is still only about 35 percent of what it was at the height of the last boom – and not likely to increase until at least 2014.

“Would-be buyers need lower their household debt levels – cut unnecessary spending and pay off high-interest rate store and credit card balances, vehicle loans and above all, any personal loans, as soon as possible.”

Botha says only 21 percent of the home loans now being granted are for 100 percent of the purchase price, and those who obtain them usually have to agree to pay a premium interest rate as high as three or four percent above prime – which is not affordable for many and adds substantially to the ultimate cost of the property.– Denise Mhlanga

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