Johannesburg - Growth in house prices is expected to slow further in 2007 and should average 11.6 percent for the year before a gradual turnaround in 2008, FNB property strategist John Loos said on Monday.
"House price inflation of 15.2 percent average for 2006 surprised on the upside, given that I had been expecting a rate closer to 12 percent for the year," Loos noted in FNB's residential property market quarterly update.
"Examining key affordability and household debt-service ratios, there has been further deterioration, but the market still appears healthy," he noted.
Last year, there were further rises in both the repayment value on an average-priced house/remuneration ratio as well as the average price/average remuneration ratio, while the household debt-service ratio also rose further.
"However, none of these ratios appear extreme by historic standards," he said.
"With affordability ratios having continued to deteriorate, some may well ask what could possibly drive a recovery in house price inflation from 2008?
My answer is the severity of looming supply side constraints, which will manifest themselves in rapid building cost inflation over the next few years along with significant land price inflation," he added.
He said analysing the residential property market in conjunction with commercial property as well as other infrastructure investment was important because these other sectors of the economy are placing huge demands on materials and skills.
These were often also relevant to the residential property sector, and factors such as increased shortages of building materials have led to rising materials cost inflation.
"It comes as no surprise, therefore, that Industry insight's residential building cost index rose by 23 percent year-on-year in October, sharply up from 0.8 percent as at the end of 2005," he added.
Increased demand for commercial property space, new government infrastructure projects, and 2010 preparations are expected to further worsen materials and skills supply constraints before they improve, Loos said.
Economic infrastructure shortages around the country's major metros would also lead to high land price inflation for land to which relevant economic infrastructure is accessible.
These constraints, coupled with an economy growing at a steady pace between 4 percent and 5 percent per annum, which implies steady middle class growth and thus housing demand growth, are expected to be key in turning residential house price inflation upward in the last years of the decade, he said.
"In other words, house price inflation may be becoming far more "cost-push" in nature than was the case at the height of the boom," he noted.
He added that he believes that it is too early for the driving forces of a house price inflation recovery to turn the declining price inflation trend around in 2007. There remains fears of further interest rate hikes, and a rental market recovery is probably only in its infant stages in response to recent rate hiking.
"Hence the expectation of further mild decline in house price inflation this year. However, I believe that 2007 will be the year in which the foundations will be laid for the recovery, which will follow in the years hereafter," he concluded. - I-Net Bridge