Although there has been stabilisation in the rate of price increases for residential properties in December 2010, the property market can expect another tough year, with economic indicators painting a grim picture.

According to First National Bank’s (FNB) figures for December, which were release during early January, the bank’s valuers anticipated more hard work for those in the property sector, with weak demand for houses relative to supply.

FNB property strategist John Loos said at the time of the release that the bank’s house price index for December, which completed the picture for 2010, proved that it was a year “of hard work for those in the property industry, although it was significantly better than 2009.”

The year-on-year rate of increase in the FNB house price index for December was 3.6%, which was unchanged from the November revised growth rate. In real terms – adjusting for a November consummate price inflation rate of 3.6% year-on-year – this means that house prices did not change in November.

“Examining last year as a whole, though, the picture was better than what the weak year-end figures suggest,” said Loos.

“The average price level was estimated to be 6.7% higher than the 2009 average price level, which translates into a real price average that was 2.3% higher last year than in 2009, when taking the first 11 months of last year into account.”

It was too early to say whether the stabilisation in the rate of price increase was any sign of a turnaround in the price trend, Loos added, but at this stage, “I think probably not.

“Rather, we believe it is possible that the two interest rate cuts in September and in November may have given the market a slight impetus through the summer months, but the residential market’s fundamentals still have much improving to do before we see any sustained turnaround in house price growth,” he said.

Households were also still deep in debt, Loos added.

Rode’s Report

According to the latest Rode’s Report on the South African property market (quarter 2010:4), on the residential front, flat rentals have started to show modest signs of acceleration in yearly growth.

Nominal flat rentals in Durban, Cape Town and Bloemfontein were up by 3%, roughly in line with the growth rate of consumer inflation (excluding housing).

However, in Johannesburg (+1%), Pretoria (+1%) and Port Elizabeth (-1%), growth in nominal rentals was unable to keep up with inflation.

As for house prices, affordability of houses remains the biggest constraint to effective demand. Here, one only has to consider the effect of the National Credit Act, the still-high levels of real house prices, job uncertainty, the high indebtedness of consumers and the much steeper electricity tariffs.

In addition, taxpayers seem to be facing income-tax hikes this year (if only through bracket creep), not to mention the ongoing escalation of assessment rates in many municipalities.

Office rentals

Office rentals were able to muster some growth, even against the headwinds of a slowing economy.

Although by no means vigorous, growth in market rentals in Johannesburg (+5%), Durban (+4%) and Pretoria (+3%) decentralised still managed to outperform building cost inflation (0%). The only exception to be found came from the Cape Town decentralised (-4%), where market rentals continued to contract.

Disappointing from an industrial property point of view was the weakness in the manufacturing sector during the reporting quarter.

The report revealed that capitalisation rates – the property equivalent of the forward earnings yield of equity; when they rise, market values tend to drop and vice versa – seem to be benefiting from benign inflation expectations, inflows of foreign portfolio capital and their positive impact on bond yields and, hence, required minimum income returns on substitute investments.

“However,” says Rode, “doubts about the sustainability of rises in market-rental growth, combined with rising municipal charges, are probably exerting a counterbalancing influence on capitalisation rates.

“With these forces in equilibrium, capitalisation rates were thus either marginally up or down when compared to the previous quarter.”

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