2009/03/05

The average nominal price of middle-segment housing dropped by 1,3% year-on-year (y/y) in February 2009 to around R950,800, after declining by 0,9% y/y in January this year.

This was the third consecutive month of declining nominal prices on a year-on-year basis. Calculated on a month-on-month basis, prices are declining since August last year, when the average nominal price peaked at a level of R965,800.

Middle-segment house prices were down by a real 8,3% y/y in January, while declining by an average of 9,6% y/y in December. This was the thirteenth consecutive month of a real y/y price drop. Real house price calculations are based on the consumer price index (CPI) for all urban areas, available from January 2008, as published by Statistics South Africa.

Before this date the calculations are based on the headline CPI for metropolitan areas, until a full historical CPI data series on the new basis is published by Statistics South Africa.

In respect of small houses (80sqm-140sqm), nominal prices were 1,7% y/y lower in February this year, after declining by 1,1% y/y in January. This brought the average nominal price of a small house to about R668,700 in February. In real terms, prices in this category of housing dropped by 8,4% y/y in January (-9,6% y/y in December last year).

The average nominal price of medium-sized houses (141sqm-220sqm) was down by 1,6% y/y in February 2009 (-1,2% y/y in January). This brought the average price in this segment of the market to R932,500, which was R19,600 less than the peak of R952,100 recorded in September last year. On a month-on-month basis, the average price of medium-sized houses dropped for the fifth consecutive month in February, by 0,5%. In real terms, prices were 8,6% y/y lower in January, after declining by a real 9,7% y/y in December 2008.

With regard to large houses (221-400sqm), prices were down by 2,4% y/y in nominal terms to around R1,360,600 in February 2009 after declining by 1,7% y/y in January. This was the biggest nominal y/y price drop since August 1986, with the average price now R35,700 below the March 2008 peak of R1,396,300.

Prices of large houses were down by a real 9,0% y/y in January this year, after declining by 10% in real terms in December 2008.

The South African economy has slowed down significantly during the course of 2008, with real value added declining at a seasonally adjusted annualised rate (saar) of 1,8% in the final quarter of last year (+0,2% in the third quarter). Real value added in the manufacturing sector dropped by a massive 21,8% (saar) in the fourth quarter.

The economy is forecast to be on the brink of a recession, which is defined as at least two consecutive quarters of negative real economic growth. Real GDP growth is projected at less than 0,5% in 2009, with the prospect of significant job losses in some sectors of the economy, which will have a negative affect on household income.

In view of an expected poorly performing economy in 2009, together with indications of sharply declining inflation in the first half of the year, the Reserve Bank's Monetary Policy Committee is forecast to cut interest rates by a further 350 basis during the rest of 2009. This will bring commercial bank's prime and mortgage interest rates to 10,5% by year-end, the level at which these interest rates bottomed before starting to rise in June 2006.

Interest rates have already been cut by a cumulative 150 basis points since December last year.

The household sector is forecast to continue experiencing some financial strain this year, despite declining inflation and interest rates. This view is closely related to an expected poorly performing economy, which may lead to further job losses, increased negative sentiment in the household and business sectors, and lower levels of consumer and investor confidence.

As a result, the housing market is expected to remain under pressure for much of 2009, with house prices forecast to drop by a nominal 3% to 4% and a real 8% to 8,5% this year.

Property24