Buyers’ market with real house prices set to fall for 5 more years – property cycle expert

South African property buyers are the biggest winners in the residential market, thanks to falling house prices.

For years now, house prices in South Africa have been declining in real terms after taking out inflation.

This is according to Erwin Rode, MD for Rode &Associates speaking at the REI Rode Virtual Conference earlier this week.

“Prices will likely still grow in nominal terms on average over the next five few years. In real terms, prices should continue to decline.”

In addition, he says from the banks’ perspective, financing residential developments will become riskier, all other factors remaining constant. The greatest risk to residential developers is not profit margins but the sales rate, points out Rode.

Falling house prices: good for first-time buyers, upgrades

However, falling prices is good news for buyers entering the market for the first time, or upscaling to bigger homes. Agents say the residential market is buoyant, and expect this to continue until late-2021.

Read also: Low interest rates, falling prices send home buyers to affluent suburbs

In nominal terms, prices grew by 2.6% in October 2020 compared to October 2019, according to the latest FNB data. “This implies that house prices declined by 0.4% in real terms after deducting consumer inflation of about 3%.”

Property cycle expert Erwin Rode, sets out his views on where house prices are heading.

Encouragingly, nominal house price growth has picked up since the initial strict lockdown. This is mostly due to lower interest rates making it more affordable to own a home compared to renting.

However, nominal prices on average still grew by only 1.8% in the first 10 months of 2020 (January to October). This is slower than the full year price growth of about 4% in 2019, says Rode.

The FNB House Price Index shows that growth reached 2.6% year-on-year (y/y) in October. Overall, residential house price growth remains below inflation, as has been the case for most of the last decade.

Houses priced below R500 000 ‘faster sellers’

According to Siphamandla Mkhwanazi, FNB Senior Economist, lower priced properties are performing better, especially those valued below R500 000.

“The bottom 20% averaged 11.4% y/y in Q3 2020, and the top 20% (>R1.9 million) was 0.7% y/y,” says Mkhwanazi.

Banks are also lending, albeit cautiously hence there has been an increase in mortgage application volumes.

Read also: Property market perks up as buyers take advantage of cheap home loan debt

“Activity is driven by lower interest rates and transfer duties, attractive house prices, and changing housing needs due to the pandemic.”

Mkhwanazi says approval rates are recovering with estimated Deeds Office data showing an increase in Loan-to-Value ratios (LTV). He notes that first-time buyers generally require higher LTVs, and banks are currently competing to gain market share.

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