Residential property to remain weak

10 January 2012

Demand for South African residential property slowed in 2011 and is not expected to improve in 2012, First National Bank said on Monday.

“2011 saw slowing growth in residential demand, with economic growth slowing noticeably in the middle two quarters of the year,” FNB home loans strategist John Loos said in a statement.

The 2011 average house price was R802 988 – 3.1% higher than the average 2010 price of R779 041. However, when adjusting for consumer price inflation (CPI), the average house price declined by about 1.9%.

The December CPI was not yet available, but Loos said average CPI for 2011 would appear to be around five percent.

“This is a return to real price decline after a mild real average price increase of +1.7% in 2010,” he said.

The FNB Valuers’ Market Strength Index showed a weakness in demand for residential property relative to supply in 2011.

“We enter 2012 with a residential market showing strong supply relative to demand, and a mediocre economic performance at best,” he said. “Nothing obvious pops up to suggest that this will change radically in 2012.”

Interest rate cuts a possibility

The South African Reserve Bank (SARB) could cut interest rates in 2012, Loos said.

“We have seen the SARB cutting very slowly since late-2009, despite a weak economy, suggesting that it is now a reluctant cutter of interest rates,” he said. “We wouldn’t expect any different in 2012, and any reduction would be a minor one, probably not making a major difference to residential demand.”

Loos predicted that house prices would decline in real terms – taking out the effect of inflation – by about three percent in 2012, assuming an average CPI inflation rate of five percent.

The more affordable segments of the housing market were predicted to outperform the higher priced segments this year.

“High transport costs due to high fuel prices and looming tolls can support demand in close proximity to key business nodes,” Loos said.

He also expected smaller homes to be more popular due to their lower running costs.