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Unemployment dents house price growth - Rode

Cape Town - There was a definite correlation between the unemployment rate and the compound growth in house prices countrywide, property research analyst Erwin Rode said on Tuesday.

But there was one exception to the rule, he told Fin24, referring to house price growth in Bloemfontein.

At the end of last year, house prices in Cape Town and Bloemfontein accelerated, while the exact opposite was happening in Port Elizabeth, the latest Rode Report on the SA Property Market showed. Rode is the CEO of Rode & Associates, publishers of the report.

Rode said their research found that where unemployment was very high, economic growth was weak, which in turn led to low growth in house prices.

John Lottering, editor of the report, said the Port Elizabeth-Uitenhage metropolitan area had the highest unemployment rate and showed the poorest growth in house prices.

He said Port Elizabeth’s economy was largely dependent on the automotive sector, and it seemed as if house prices there are bearing the brunt of decelerating and poor growth in motor trade sales.

"The growth in motor sales and house prices in Port Elizabeth has been losing momentum since 2010. In fact, house prices in Port Elizabeth have lost so much steam that in the fourth quarter of 2014, middle-segment houses were down by 2% when compared to a year earlier."

The researchers painted a bleak picture for the PE region.

"For now, household finances are expected to remain under pressure — read higher fuel prices, higher electricity tariffs and the inevitable hike in interest rates, and high debt levels – not to mention stunted salary increases and maybe job losses. Hence, a quick turnaround in the sales of durable goods, such as motor vehicles, cannot be expected.

"Naturally, a sustained weaker rand exchange rate might improve the export competitiveness of domestically produced vehicles, so eventually, this should be good news for the Port Elizabeth economy."

On the other side of the scale, Cape Town, where the unemployment rate was the lowest (24%), house prices were over the past three-year period also able to show the strongest compound growth of 11% p.a.

In the fourth quarter of 2014, house prices in Cape Town showed the strongest yearly growth of 17%, way above the national average of 9%.

"The robust inverse relationship between these variables - unemployment and house price growth - again confirmed that house prices are largely driven by the performance of the local economy, holding constant differences in new supply," said Rode.

An anomaly was Bloemfontein, said Rode. "Despite having a higher unemployment rate, it was able to show growth in house prices at a par with Cape Town.

"We find Bloemfontein’s performance to be the result of both demand- and supply-side factors and asked Mike Spencer of Platinum Global, an expert on the Bloemfontein market, for input."

According to Rode Spencer said "on the supply side, while there was a Spatial Development Plan (SDP), there had been little planning by Mangaung for infrastructure like roads, sewage, water and electricity. The demand for houses might have been supported by strong growth in the number of public-sector employees, as well as their unsustainably strong salary increases".

For the fourth quarter of 2014, Bloemfontein recorded 11% growth in nominal house prices, while Johannesburg added 12%, Pretoria 11%, and Durban 7%.

The report also showed that flat rentals are gaining momentum. However, whether this trend will continue was moot, in light of households that remain financially stretched, and are about to become even more so.

Noteworthy growth rates were as follows: Pretoria (+8%), the East Rand (+7%), Durban (+5%), Johannesburg (+5%) and Cape Town (+5%). These growth rates compare with the CPI of 6% (excl. home owners’ equivalent rent) in the reporting quarter.

On the office front, the report shows that office rentals in Sandton, the country’s financial hub and premier office node, are shrinking.

In the fourth quarter of 2014, market rentals for grade-A multi-tenanted office property in Sandton were down by roughly 4%. Of concern, said Rode, was the fact that committed new office developments continue to grow.

Similar to Sandton, the performance of rentals in other top suburban office nodes in Johannesburg was also poor to modest. As a result, Johannesburg decentralised as a whole recorded growth of only 2%.

On average, rentals in Pretoria (+5%) and Durban decentralised (+4%) fared slightly better. The best performance, however, came from Cape Town decentralised. Thanks to office vacancy rates that were able to move south, the growth in market rentals in Cape Town accelerated to 10%.

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