Property Talk

Examples of these key drivers that property economists like to watch closely are economic growth, disposable income growth of households and the level of indebtedness of households (household credit growth). The price performance of residential property for 2012 to date as measured by the FNB House Price Index has shown that growth in prices has declined for the past seven months from a peak of 8,4% in March 2012 to 2,7% in October 2012.

If we adjust these growth rates for inflation we see that we are in negative real price growth territory (-1.01% in September 2012 and the October figures not as yet available). If we look only at holiday towns in South Africa, the real price growth has been negative for a while and is currently -3.1%, but is in fact better than the -5.6% from the previous quarter.

Since the peak of the FNB Holiday Town Price Index in the 3rd quarter of 2007 real prices have grown (declined) by -23.9%. The recent improvement in prices of holiday homes indicates that people are taking advantage of the lower prices and again looking to invest in holiday homes.

The prediction for the near future price performance does however remain constrained by the key drivers. Firstly, overall real disposable income growth is down at 3.5% in the 2nd quarter of 2012 from a peak of 5.7% in the final quarter of 2010. Secondly, the accelerating household credit growth, driven by very strong growth in the non-mortgage credit components, will curb the purchasing power growth of households.

This makes it more difficult for people to take on additional mortgage debt. The prudent approach of limiting debt, as far as possible, to long-term investments such as property, is not embraced by most people and is one of the fundamental reasons why it will be so difficult for these individuals to escape the debt trap, where they finance so much of their current expenditure on credit, they end up paying a disproportionate amount of interest.

Banks love short term unsecured lending as it is far more profitable than long-term mortgage finance. Thirdly, overall economic growth is expected to be lower with 2012 figures revised downwards to 2.5%. The South African Reserve Bank leading business cycle indicator points to flat economic growth rates in the near term and because this correlates so well with mortgage loan growth, we can expect the same for property prices.

We therefore remain firmly in a buyers market with excellent pricing and choice being the hallmarks of the current property market cycle. Accurate pricing of a property remains the most important aspect of attracting a sale.

For further information and an interactive analysis of this article follow my blog: andreaswassenaar.blogspot.com.