Demand for houses to grow

"Although in these relatively gloomy times it is sometimes difficult to see light at the end of the tunnel, it is always important to remember that property runs in cycles, and at some point the cycle turns," said John Loos, a property strategist at First National Bank (FNB).

His comments comes amid slowing house prices and a burgeoning rental property market as buyers shy away from buying new homes due to the high interest rate environment.

So the cycle's turn is dependent on interest rates staying flat, which Loos believes is the case, despite the key inflation measure staying above the central bank's 3% to 6% target band.

Attractive investment

"Although CPIX inflation still runs well above the target limit of 6%, it's more the significant weakening in some key domestic demand indicators which leads to our belief that the SA Reserve Bank may well believe that it has done enough to cool home-grown inflationary pressures," said Loos.

Mushrooming demand for rental property market is also expected to improve attractiveness of residential property as an investment, Loos said.

The latest FNB Residential Property Barometer for rental markets showed that activity levels in the rental market were high, with three-quarters of rental property getting snapped up within a month of coming on to the market.

Developers to suffer

An expected slowdown in building of new homes, which started last year due weak demand and will be driven lower by Eskom's capacity constraints this year, would improve property returns, according to Loos.

"This is not great from a developer point of view, but for property returns to improve it is important that we have a slowdown in growth of stock, and 2008 looks set to be a dismal year from a development point of view," Loos said.

He expected demand to pick up by the end of June this year, while house price inflation would probably only respond with a little more of a time lag towards the end of next year.

- I-Net Bridge