Property Talk

Author: Andreas Wassenaar
Date: 2014-09-12

As students of the property market it is insightful for us to study the components of the South African Reserve Bank's Consumer Price Index (CPI) measure of inflation. If we understand where inflation is likely to be over the next twelve months we will have a reasonably good idea of where interest rates are going to be and therefore what the general property market will look like. For buyers and sellers it is useful to have a clear vision of the most likely future property market scenario to ensure that we sell at the right time and hopefully also time our buying decisions correctly. For those buyers that committed at the height of the market between 2005 and 2007, it is frustrating to see similar pricing for many property types seven years later.

Timing is therefore an important aspect in determining the rate of return we end up with. When the stock market is considered high and overbought, warning bells alert us to the potential danger of a price adjustment. It is the same in a property market. Had you heeded these signals in 2005 when the South African house prices raced ahead at a blistering pace, with the FNB House Price Index recording a 36,3% year-on-year growth rate in February 2005, you would have recognized that it was time to sell. At this stage the recorded demand rating exceeded the supply rating by its widest margin. By 2008 it was too late.

The market had changed and buyers fled while everybody seemed to become a seller. The very slow recovery from the low point in 2009 has provided excellent buying opportunities over an extended period. Buyers have been spoilt for choice and while the current buyers market can be expected to continue in the near term it is a far more of a balanced market with the lower price brackets already showing signs of a shift to a seller's market. Scarcity has taken hold of vacant land priced below R1m within any of our large gated estates along the north coast and pricing in Simbithi, Brettenwood, Dunkirk and even Hilltop Estate has escalated at a surprising pace.

The latest CPI figures released indicate overall inflation to be 6,3% for July 2014 - marginally down from the previous month's 6,6%. The main drivers of the current inflation rate, when considering the major sub-segments are (1) Food inflation - escalated at 9% in July, but marginally down from 9,24% in June, (2) Transport inflation at 6,9% in July and down substantially from 8,6% in June, (3) Housing and Utilities inflation recorded at 5,9% in July, up marginally from the 5,8% in June. It is interesting to note that the sub-segment that includes municipal rates has escalated at 8,4% in July up from 8% in June. These administered prices of rates, water and electricity are escalating at rates above the average inflation rate and drive rentals upwards. (4) Home Maintenance and Repairs inflation has increased steadily from 3,2% at the beginning of 2014 to 6,4% in July.

The conclusion we can draw from the latest CPI figures is that despite a marginal easing in the overall inflation rate, upward pressure on interest rates will be maintained until CPI inflation falls below 6%. FNB forecast the prime interest rate at 10,25% at the end of 2015 from its current 9,25%. We can therefore expect limited house price inflation. Rental inflation is however expected to increase further, especially in hotspots of development such as the Dolphin Coast.

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

Andreas Wassenaar

Seeff KZN Chairman

Principal - Seeff Dolphin Coast

andreasw@seeff.com

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