House prices rise at a very modest rate

House for sale.photo: Simphiwe Mbokazi

House for sale.photo: Simphiwe Mbokazi

Published Jul 28, 2016

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Johannesburg - House price inflation in upper income areas is being hit harder than in low income areas, according to First National Bank (FNB).

Read also: Western Cape property market supports the rest

John Loos, a household and property sector strategist at FNB, said yesterday that the relative performance of FNB’s area value band house price indices in the six major metros in South Africa continued to point to the high end of the market being generally a bit weaker than the more affordable metro areas.

Loos said this was to be expected in these increasingly constrained economic and financial times. “Affordability appears to be an increasingly important factor in residential demand these days,” he said.

The low income area house price index showed the strongest year-on-year growth and accelerated mildly to 6.4 percent in the second quarter of this year from 5.5 percent in the previous quarter.

The average year-on-year house price growth in the middle and upper income areas was the slowest, with house prices increasing on average in the same period by 3.9 percent in middle income areas and by 4 percent in upper income areas.

Loos said the house price inflation rates of both these segments had slowed from the highest growth rates of the four segments in 2014.

“With interest rates rising, municipal rates and utilities tariffs rising sharply and effective personal tax rates being ratcheted up in a no growth economy, it was not surprising to see the average house price growth of the middle and upper income area being the slowest,” he said.

New worth

A new high in the new worth house price index, which was compiled from FNB’s higher priced areas showed a house price average of R4.3 million.

This index appeared to emphasise the relative weakness at the high end of the residential market, with houses in this price band showing only 2.7 percent year-on-year price growth in the second quarter of this year.

“This growth rate is noticeably slower than all four of the main area value band indices, providing further support for the perception that the high end of the market with its large and costly-to-run homes is the softer part of the market in financially tougher times,” he said.

Loos said there was a minus 5.8 percent year-on-year decline in estimated transaction volumes in low income areas in the six months to March last year at a time when these areas had the strongest estimated price growth.

But Loos said this might point more to supply constraints rather than demand weakness.

Constraints

The relative performance of the value band house price segments were believed to be evidence of mounting financial constraints within the household sector and weak consumer confidence levels.

The running costs of a home had risen dramatically because of increases in municipal rates and tariffs far in excess of average consumer inflation, while real household disposable income growth had slowed in recent years and interest rates and effective income tax rates on households had risen.

In addition, the sliding scale for transfer duty had increased to 11 percent for property transactions exceeding R2.24m and 13 percent above R10m.

Loos said all these factors should count more against the higher end of the market and a search for greater affordability should be expected.

However, he said this did not imply that the lower end of the market would remain strong. “It too will ultimately feel the negative impact of economic weakness,” he said.

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