House prices could tumble

Property values actually falling in 2008 seems increasingly possible if Standard Bank's latest data is used as a benchmark for SA house price movements.

Standard Bank's Property Gauge released earlier today shows that house price growth slowed to zero in December 2007 (y-o-y), down from 6.5% in November.

Although Standard Bank property economist Sizwe Nxedlana is still predicting price growth in the low single digits for 2008, he also mentions for the first time the possibility of negative year-on-year growth rates in some months.

However, Standard Bank's housing data looks decidedly different to that of Absa Bank. Absa still recorded rather robust growth of 11% in December, with Absa senior economist Jacques du Toit expecting house price growth to dip no lower than 9% in 2008.

The discrepancy between the two house price indices can be attributed to differences in the way that each bank measures house prices.

Standard Bank uses the median or middle price, while Absa uses the average price. Industry players are divided on which methodology is a more reliable indicator of house price movements.

Interest rates key

Some say that median prices are more widely used than average prices internationally, suggesting that Standard Bank's figures represent a better reflection of SA housing trends.

Others prefer to use Absa's figures, saying that Standard Bank's data is not smoothed or filtered, which creates potential for significant swings in month-to-month data.

Be that as it may, the bottom line remains that housing activity slowed significantly towards end-2007. Estate agents and mortgage originators report a drop of at least 30% in the number of property transactions in fourth quarter 2007 (y-o-y). That begs the question whether a drop in prices will follow the drop in sales.

FNB property strategist John Loos believes that prices falling in nominal terms are an unlikely scenario. He notes that a house price crash has only occurred once in SA in the past 40 years - in the mid-'80s.

"That was a period characterised by extreme economic conditions in the form of multi-year economic contractions following the gold boom, interest rates in excess of 21%, and housing affordability at its worst levels on record."

Loos says it all depends on interest rates. "There is always the risk of a house price crash but the chances of that happening are slim."

- Fin24