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Outlook trend of real drop in house prices might turn in 2018

Jan 28 2018 06:00
Justin Brown

However, the ANC’s resolution about expropriation of land without compensation is likely to have a negative impact on property prices.

The trend that has seen the growth in local residential property prices fall below consumer inflation, so in real terms properties are becoming less valuable, might change in 2018.

FNB property strategist John Loos said that the level of house price inflation was likely to increase to about 5.9% in 2018 on the back of improved sentiment and confidence in the country, up from real property price declines in 2017 and 2016.

The improved sentiment stems from the decision by the ANC delegates in December to make Cyril Ramaphosa ANC leader, which had seen the rand strengthen.

However, given that inflation was expected to be 4.9% this year, the price of property would show a marginal hike in real terms.

For the rest of this decade, local property prices on average were likely to show real declines due to an economy that was in the doldrums, Loos said.

On the other hand, Paul-Roux De Kock, Lightstone Property analytics director, said that: “What makes us believe that the market will dip even further in 2018, is the trend in the luxury property market, which is usually an early indicator of where the general trend will move.”

In 2017, the price of luxury property started to show signs of possibly declining.

“A strong recovery in the lower and mid value market segments can however pull the overall residential property price growth up to the point where we can see a slightly better 2018 than 2017.”

According to Lightstone, on average, national property prices are likely to have increased by about 4% in 2017, so this means that in real terms property prices have decreased.

The general market is being propped up by the low end affordable market, De Kock said.

“People are coming out of informal housing into formal housing – so there is a push on demand there. Due to the tough economic environment, there are a lot of people who want to downgrade.”

De Kock said another key factor that was weighing on sentiment towards buying residential property was “home buyers’ confidence”.

“This is very much driven by political noise. So we would expect that if political noise dissipates, that should have a positive effect on the housing market and house price growth.”

However, the resolution at the ANC elective conference about expropriation of land without compensation would have a negative impact on property prices.

“I think this political uncertainty will limit any excitement that we will see in the property market in 2018.”

“People might be feeling it is more of a gamble to buy property than it was 10 years ago. Now there are also more alternatives, such as crypto currencies, that investors can play with.”

Loos said that possible pro-growth policies under Ramaphosa could see the situation turned around.

He said he expected local interest rates to remain stable until late in 2018.

In 2017, the increase in house prices had improved as the year went on, with December 2017 prices increasing by 6.1% year on year, Loos said.

Property at the lower end of the market was likely to show the best improvement in prices.

Another trend that Loos identified was that property owners were downscaling to more affordable properties – this was especially in the case of people over the age of 50.

The Western Cape property market remained the exception to the national rule of real decreases in property prices, but the Western Cape market was showing signs of coming off due to affordability challenges, Loos said.

According to Lightstone figures, on average, Cape Town property prices increased by 12.7% for the year ended November 2017, compared with the national average of almost 4%.

Since October 2015, Cape Town property prices have been increasing by more than 10% a year.

“What you are experiencing in Cape Town is similar to what you are experiencing in San Francisco, London and New York. You have a semi-landlocked area and an increase in demand, especially in the City Bowl,” De Kock said.

In the year to November 2017, Tshwane house prices rose 3.7%, in Johannesburg the increase was 2.4%, in Ekurhuleni the house price hike was 3.6%, eThekwini house prices were up 3.1% and in Port Elizabeth prices rose 5.3%.

Cape Town was attracting wealthy people and this was boosting the more expensive properties, while in Gauteng people where coming in from places such as Limpopo and Mpumalanga, and this was boosting the affordable market, De Kock said.

A reflection of the state of property in the Western Cape was that first-time buyers only made up 8% of the total buyers, compared with 25% nationally, Loos said.

The Western Cape, especially Cape Town, had always been an exception to other metros due to the relative land scarcity in the city, while in Gauteng urban sprawl kept prices low, he added.

The Western Cape was attractive to people from the rest of the country as it was seen as a lifestyle province that was developing a modern technology economy as well as good governance.

The City Bowl, Atlantic seaboard and southern suburbs of Cape Town continued to be bright spots in the local property sector, while Durban North was emerging as a prime property area.

To the north of Durban, Ballito was emerging as a commuter town and not just a holiday area, Loos said.

In Durban North, property was also doing well with “more people and businesses establishing themselves there”, De Kock said.

In Johannesburg, the crime and grime were seeing mega estates like Steyn City and Dainfern being developed for the wealthy, Loss said.

De Kock commented that estates in general were doing better than the freehold markets.

An interesting trend that Lightstone had uncovered was that the total value locked up in estates was worth more than the value of sectional title property.

Lightstone estimates that there are 6.5 million residential properties, out of a total of 7.9 million properties, and these residential properties are valued at R5 trillion.

Of the 6.5 million residential properties, 5.5% are in residential estates, and these estates are worth 15.5% of the total residential property value.

Sectional scheme homes make up 11.6% of the number of properties and 14.8% of the total value.

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