The slowdown in the housing market is now clearly entrenched, with a persistent deceleration in the growth of house prices.
In June, house prices grew by 6.5% y/y - the lowest since January 2003. Although the monthly numbers, like most economic indicators, are inherently volatile, this corroborates the slowdown in consumer activity reflected in other indicators such as retail and car sales. This slowdown is expected to be aggravated by the moderate rise in interest rates.
House prices are expected to consolidate at their current, elevated levels, which should still imply a reasonable average growth for the year, albeit sharply lower than before. Last year, South Africa experienced the highest house price growth in the world according to The Economist. Following such rapid growth, and in the absence of fresh stimulus following, amongst other supportive factors, the earlier 6,5 percentage points drop in interest rates, a slowdown is to be expected.
Far from a boom-bust scenario, South Africa's property market, albeit losing the vigorous pace it enjoyed over previous years, has entered a more stable period. Other countries, such as Australia, the United Kingdom and the United States, also appear to have escaped a rapid decline in house price growth and instead are experiencing gradual slowdowns.
The deceleration in house price growth is more than a loss of momentum and absence of fresh stimulus. Consumers' ability to pay higher house prices are constrained by rising interest rates and the combined impact of sharp rises in petrol and food prices, which limits further house price growth.
Furthermore, deteriorating prospects for capital gains, alongside a moderation in rental growth, have been reducing the allure of the property market for investors. This significantly dampens the demand for residential property and consequently reduces the pressure on house prices.
In other words, the sharp decline in house price growth measured in June, therefore, reflects both an underlying trend and some short-term volatility inherent in the data. For a proper interpretation of the data, it is therefore important to understand how house price indices are constructed.
Unpacking the Standard Bank House Price Index
Constructing house price indices is notoriously difficult. Apart from the challenges that are generally faced when constructing indices, measuring house prices is complicated by the fact that the available data usually stem from the properties sold during a particular period, rather than from a well-designed sample that is representative of all houses.
This is aggravated by the heterogeneity of houses. This means that the data need to be interpreted carefully, as changes in the measured prices may be due to:
actual changes in the general price level;
changes in the distribution of the houses being sold, for example more sales of luxury houses, may push up the measured house prices even without changes in general prices; or
the changes may simply be random.
Furthermore, national data from the Deeds Office are available only with a relatively long lag of up to nine months, so current indicators of the housing market are usually based on a particular institution's experience. In this report, data from the Deeds Office are used wherever possible, and are supplemented by data from mortgages granted by Standard Bank, which has a market share of about 25.4% of all new mortgages registered.
The data from these two sources are generally highly correlated. Nevertheless, it should be kept in mind that the data are representative of Standard Bank's client base, and may therefore differ from the data of other institutions. Standard Bank's House Price Index is based on the median price of all houses mortgaged by Standard Bank.
The median house price is one of the most common measurements used globally to calculate house price indices. The unsmoothed data are presented to prevent the choice of smoothing technique from influencing the results, and also to prevent the smoothing from masking incipient trends that might be meaningful, such as the pick-up in house price growth following the 50 basis point interest rate cut in 2005. Nevertheless, a 5-month moving average is added to the graphs to highlight the general trends.
In June, the median house price grew by 6.5% from the year before
1). The deceleration in house price growth corroborates the slowdown in consumer activity reflected in indicators such as retail and car sales. Furthermore, the relatively low growth in June could be at least partly attributed to the increased number of relatively affordable houses being sold.
For example, up to April, sales of houses costing less than R500 000 declined as a proportion of total sales. In May and June, however, sales of houses in this price class rose relative to total sales. With relatively more houses being sold for prices below the average and median, both measures would have been pulled downwards.
This might have been a result of the noticeable reduction in transfer duties on houses priced below R500 000 from 1 March 2006, but also of the Financial Sector Charter-related increase in transactions in "affordable" housing . Even though the transfer duty cost declined across the price spectrum, houses sold for less than R500 000 benefited (as a percentage of the price) relatively more.
The increase in the volume of transactions at the lower end of the price spectrum also explains why the growth in mortgage advances still exceeds the growth in house prices. But even here an imminent slowdown is already reflected by the month-on-month growth rates, in which the turning point will precede that in the year-on-year growth rates. (Total mortgage advances would also be boosted by an increase in further advances on existing mortgage loans.)
The bottom line
The domestic property boom coincided with a global increase in property values and a very benign macro financial setting. The deterioration in households' financial situations on the back of record-high indebtedness, a record-low savings rate, record-high petrol prices and rising interest rates will constrain further growth in the short term.
