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Given a stagnating economy, high unemployment, political shenanigans and a commodity crisis, 2015 was never on track to be a house price growth record-breaker.
Then came Nenegate, adding to the derailment of confidence in the country’s economy. If that were not enough, looming on the horizon is the country’s possible downgrading to junk status by the international credit ratings agencies.
It is little wonder then that there has been a softening in the growth of house prices. And if investors and prospective homeowners believe that future domestic conditions could lead to a reduction in property value or put the achievement of capital appreciation in question, there will be added reticence for investment into this asset class.
It’s one of the reasons why investors and homeowners keep close tabs on house price growth trends. But pinpointing that exact number is no easy task, due in no small part to the different methodologies used in house price indices.
Nonetheless, given figures posted by the country’s banks, mortgage originators, estate agents and other property price indexers, it’s probably fairly safe to say that on average, house price growth for 2015 did not fare much better than around 5.5%, substantially less than the 9% posted for 2014. Still, it was a good sight better than many other advanced economies.
Housing sectors growth patterns
Properties showing the most noticeable slowing in price inflation are those at the upper end of the market. While the affordable housing segment appears to be a key driver of overall house price growth, based on Absa’s house price data, year-on-year growth in home values was on a declining trend through 2015:
Luxury housing (homes priced between R4.2m and R15.5m): Prices grew by 4.1% year-on-year to R6.1m in the final quarter of 2015. For the full year, the luxury segment posted nominal price growth of 7% against 9.3% in 2014.
Middle segment housing (80m2- 400m2 homes priced at R4.2m or less): The average nominal price (transaction price) growth of housing in the middle segment of the market slowed down further to 4.8% year-on-year to a level of around R1.38m in the fourth quarter of 2015. For the full year, the segment posted nominal price growth of 6.1% compared with 9.3% in 2014.
Affordable housing (40m2-79m2 homes priced up to R575 000): The fourth quarter of 2015 saw the average price of affordable housing increasing by 9.1% year-on-year to around R417 000.
Nominal price growth for the full year of 2015 was 9.2% compared with 2014’s growth of 6.6%.
In the six major metro regions, it is the upper income area segment that has shown the most noticeable slowing in house price growth, says John Loos, household and property sector strategist at FNB Home Loans.
Loos says the growth in the upper income area segment’s average house price of R2.72m slowed to 5.1% by the fourth quarter of 2015 from 10.2% in the third quarter of 2014.
But, he says, year-on-year price inflation was still stronger than the low income areas value bands’ figure of 4.6% where the average house price is R472 848.
By comparison, the lower middle income area segment with its average house price of R900 323 inflated by 5.5% year-on-year, while the middle income area index with an average house price of R1.479m showed the strongest average price growth of 6.7%.
What 2016 holds
A number of pressures will be exerted on the growth in house prices during 2016 among them declining consumer confidence, inflation, higher interest rates as well as unemployment and stagnating incomes.
Absa and FNB expect house price growth in the lower priced sectors of the market to outperform others, albeit not for any significant length of time because of expected affordability constraints, adds Loos.
While house prices are forecast by a number of house price indices to rise by about 5% in nominal terms in 2016, Property Analytics company Lightstone Property presents a more sobering forecast, that of 3.5%, a figure substantially lower than the 5.5% national house price inflation posted for 2015.
That figure could increase to 4.6% if the economy grows more than expected, adds Lightstone, but if on the other hand economic growth remains sluggish and interest rates increase, the forecast could drop as low as 2.5%.
A softening house market is unlikely to be aided by increased transfer duty and capital gains tax arising from the 2016 Budget.
But not everyone is pessimistic. “I don’t think that these measures will have any effect on house price growth for that upper bracket or on any other bands further down,” Jacques du Toit, property analyst at Absa Home Loans, tells finweek.
This article originally appeared in the 10 March 2016 edition of finweek. Buy and download the magazine here.
