Property Talk

Author: Andreas Wassenaar
Date: 2014-04-05

Last week we looked at the very high end of residential real estate in the country. It is now opportune to consider the very low end of the formal residential housing market.

The areas formerly classified as "Black Township Areas" under Apartheid era classifications outperformed the former "White Suburbs" in terms of house price growth late in 2013 according to FNB's Major Metro Township House Price Index.

These prices rose by 7,6% year-on-year, slightly above the 7,1% recorded for the previous quarter of this township index and higher than the 6,2% recorded for the entire market in the 6 major metros across the country.

The growth in Township house prices has been marginally above the CPI inflation rate providing for some real house price growth and represents a solid market where demand is reasonably well balanced with supply.

Because a significant portion of the country's first time buyers enter the residential markets via established parts of the former township markets or via the Affordable Housing Developments programmes, we can expect economic conditions that impact on first time buyer activity to directly impact on this sector of the market as well.

For those who already own homes, news of increasing home prices is welcomed. However, those who are still looking to get into the market, rising prices caused by supply constraints would be a concern. Two major forces currently constrain the delivery of new homes within the township markets. The first is rising building costs.

This is best measured by the Producer Price Index for Building Materials, measured at 6,64% at the end of 2013, which is down from the recent peak of 8,4% recorded in Oct 2013. The basic raw material inputs to housing delivery, being cement, bricks, steel, glass and timber are expected to experience increased upward pressure this year, which can then be expected to increase prices of new homes and limit their supply.

The other main force constraining the supply of new homes at the lower end of the spectrum is the extremely low growth in employment in the non-agricultural sector. The most recently available figures for the 3rd quarter of 2013 show non-agricultural employment growth at a meager 0,17%. You cannot sell new homes to people who do not have gainful employment and disposable income.

The lower end of any residential property market is very credit and interest rate-sensitive. The general expectation is that our prime rate will increase to 10% from the current 9% level during the course of 2014 and then peak at 11% during 2015. Increasing interest rates have an immediate impact on the demand for residential property across the board but particularly for first time buyers targeting the entry level of the market.

The gradual long-term trend towards a higher portion of the country's households being housed in formal housing will however continue. We have seen a gradual increase in this formal housing component from 68,7% in 1996 to 76,6% in 2012, and even though the pace is slow, it is steady and upwards.

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

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