House prices in South Africa have been on a downward spiral since the onset of the financial crisis a year ago, but with affordability now improving can we expect a return to growth?

While the credit crunch originated from a tide of bad debts stemming from the subprime mortgage market in the US, most market commentators suggest the bursting of the property bubble was inevitable, due to the growing disparity between incomes and house prices.

In South Africa, house prices grew 3.7% last year in nominal (actual growth) terms. However, it was the first time since 1999 that prices in real terms (taking into account inflation) actually declined.

In fact, in real terms house prices have actually been falling month-on-month since September 2007. This year, Absa forecasts a 3.5% decline in prices in nominal terms, however in real terms the change is much steeper, with the bank predicting a 10% decline.

While price indicators around the world use both nominal and real statistics to ascertain the health of the property market, real prices are often quoted in developing economies as inflation tends to be higher.

So is there any good news for homeowners? Jacques du Toit, senior property analyst at Absa, says we can expect to see a return to growth in nominal house prices next year.

“We expect price deflation to continue for the rest of 2009, although the pace of deflation is expected to slow down. We forecast prices to start increasing again in early 2010,” says du Toit.

However, while nominal house prices may start to increase again early next year, with inflation remaining relatively high, real prices are expected to remain in the doldrums for some time to come, according to Erwin Rode, head of property research group Rode & Associates.

“Expect house prices to keep on declining in real terms for many years yet. By this I mean that prices will grow at a significantly lower rate than inflation,” says Rode.

Are interest rates helping the cause?

In line with financial policies around the world, South Africa’s Reserve Bank has been steadily cutting interest rates since the end of 2008 in a bid to help provide some stimulus to the economy.

Interest rates have been slashed by 500 basis points since the end of last year, and while the central bank paused in its downward cycle in May, to the surprise of many, it took the decision to cut rates again earlier this month.

“We anticipate another rate cut in October of 50 basis points, bringing prime rate down to 10%. Thereafter we expect interest rates to remain unchanged at 10% until late in 2010 at which point rates are expected to move marginally higher,” said Nicky Weimar, senior economist at Nedbank.

So will the recent interest rate cuts help stimulate interest in the property market? House prices grew at a much faster rate than wages over the last few years, so inevitably affordability remains a major constraint on further lending.

In fact Erwin Rode goes as far to suggest that reducing interest rates could end up doing more harm than good.

“In the end property will gain if and when the economy gains. The big question is whether the most recent cut is sustainable. Last time we went too low with interest rates and maybe this time too,” says Rode.

Who will benefit first?

While in real terms pricing indicates how much you are actually making on your property relevant to the current economy, most of us look at real house prices as an indicator of how much our homes are worth and how much they have risen by.

So when the recovery does occur are we all set to benefit immediately? Rode says not. “When the recovery does materialise, I expect the luxury segment to recover first because these people will be the first to benefit from an upturn. It does not pay to be poor,” he says.

Mirroring Rode’s comments, the latest Absa housing review for July revealed that the nominal price of large houses increased by a marginal 0.4% year-on-year in July, the first year-on-year price rise since October 2008.

"The expectation is for the property market to enter a gradual recovery from early next year and to continue to improve steadily during the course of the year into 2011" - du Toit

The report also revealed, however, that the price of small and medium sized homes both fell 4.8% year-on-year in July, indicating that for the more affordable end of the market there is still some way to go.

So why is the luxury end of the property market displaying signs of recovery already, and is it a sign that the market is getting back on track?

“The upper end of the market is largely driven by high-income households, which are probably less affected by economic developments such as rising interest rates and inflation, and job losses, affecting household income,” says du Toit.

The outlook for SA property

As Erwin Rode cautions, “Don’t bank on significant nominal growth; rather bank on significant real declines.” However, it seems that for the wealthiest there are the possible green shoots of recovery, albeit it at a slower rate than we’ve seen before.

Absa’s Jacques du Toit does suggest that there are some positive signs in the housing market as the volume of property transactions are bottoming out.

“The expectation is for the property market to enter a gradual recovery from early next year and to continue to improve steadily during the course of the year into 2011,” says du Toit.

He notes however that house price growth in South Africa is expected to remain relatively low compared with what was experienced in 2003-2006.

It seems it’s not all doom and gloom in the property market, and while we may not be seeing the higher returns of recent years, we can be thankful that South Africa’s house prices have bucked the worst ravages seen in the developed world’s property market.