Low house prices good for investors

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10 Jan 2013

Investors can expect property yields to increase further in 2013 making property an attractive class thanks to low house price growth, says a report.

The upside of expected very low price growth in 2013, for future aspirant investors at least, is that we would expect yields on housing to broadly increase further, as they have been doing gradually since after the boom years, slowly improving property’s attractiveness as an asset class.

The FNB 2012 House Price Index report reveals that 2012 was a slightly better year overall than 2011, in terms of house price performance.

However, this year average house price growth may be slightly weaker.

Writing in the report, John Loos, FNB household and property sector strategist explains that the average house price in 2012 rose by 5 percent from 3.3 percent in 2011.

In real terms, 2012 continued to show mild real house price decline to -0.6 percent - a lesser decline than the real decline of -1.7 percent in 2011 while the average price of homes transacted was R845 106 in 2012 (R804 536 in 2011).

Loos points out that in real terms, the FNB House Price Index remained well-above levels of the early last decade, with the real price average for 2012 still 70.7 percent above the real average price for 2001.

In nominal terms, the 2012 average price was 218 percent higher than the 2001 price level.

The bank expects house price growth in 2013 to be more subdued than 2012 with nominal average rise of 2.5 percent for the year.

“Given that consumer price inflation looks set to be more around 5 to 6 percent this year on average, that would imply further “downward correction” in real price terms (when house prices are adjusted for CPI inflation),” says Loos.

He points to key issues impacting the housing market:

1. Household financial pressure leading to expectations that the search for affordability in housing remains priority for many.

2. Increases in municipal rates and utilities tariffs are set to remain problematic for homeowners, and this can also exert pressure on house prices, especially on the high end of the market.

3. While further economic weakness can lead to further interest rate reduction, recent years have suggested that the Reserve Bank is reluctant to cut, and any downward movement in rates (such as the lone rate cut in 2011) is likely to be almost insignificant.

He adds that the upside of expected very low price growth in 2013, for future aspirant investors at least, is that we would expect yields on housing to broadly increase further, as they have been doing gradually since after the boom years, slowly improving property’s attractiveness as an asset class. - Denise Mhlanga

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