Nominal house price growth of between 5% and 6% is projected for 2008, resulting in a price decline of around 4.5% this year, according to the country's biggest mortgage lender Absa. This is taking into headline consumer price inflation projections, it says.
This will be the first time since 1999 that real price growth will be in negative territory. The banking group said CPIX inflation, currently at above 10% and well above the 6% upper limit of the inflation target range, is forecast to remain under upward pressure over the short term on the back of international oil price, food price and exchange rate movements.
As a result, inflation expectations will remain high in coming months, which will have a significant effect on demands for higher wages this year. According to the latest projections by the South African Reserve Bank,CPIX inflation is expected to gradually decline from around the second quarter of 2008 to only reach the 6% level by late 2009.
"In view of these developments and expectations on the inflation front, the Reserve Bank's Monetary Policy Committee is expected to hike interest rates again in June, with a risk of further rate hikes later in the year ifCPIX inflation remains stubbornly high.
Interest rates are forecast to stay high throughout 2009 in an attempt to get inflation under control, with rates only to be cut in early 2010," says Jacques du Toit, senior property analyst at Absa.
These factors, as well as the effect of the National Credit Act, he says, are set to cause a further slowdown in the residential property market over the next 12 to 18 months as households' financial position remains under pressure with growth in real household disposable income forecast to be significantly lower in 2008 and 2009 than in the past few years.
"The affordability of housing, already a major issue for many prospective homebuyers in especially the low and middle-income categories, will become even more important against this background and cause homebuyers to consider even smaller, more affordable and higher density housing in future.
"In view of these expectations, nominal house price growth of 5% to 6% is forecast for 2008, with real prices set to decline by around 4.5% this year, taking account of headline consumer price inflation projections. "This will be the first time since 1999 that real house price growth will be in negative territory," says Du Toit.
In 2009, nominal house price growth is projected to decline even further to a level of just below 4%, with prices set to drop again in real terms next year. However, with the residential property market expected to slow down further towards the end of 2008, and bottoming in 2009, it will in the second half of this year and in 2009 be time to buy property, especially from an investment point of view, according to Du Toit.
He says investors in the housing market should not expect to achievepositive real capital appreciation during the next 24 months, but with an increase in demand for rental property, an acceptable income return may beachieved during this period.
"In view of property being a medium to longer-term investment (5 years and longer), property investors should look through the current downward cycle and focus on income returns, with a view of achieving positive real capital appreciation as from 2010," adds Du Toit.