Review of South African house prices for 2012 and a look ahead at 2013 tell us that there are real buying opportunites for our overseas clients with the combination of property prices under pressure and a very weak rand .
2012 was a slightly better year overall than 2011, in terms of house price performance, but weak economic conditions as we entered this year suggest that 2013 average house price growth may be slightly weaker.
According to the FNB House Price Index, the average house price for the entire 2012 rose by 5% compared with the average price for 2011. This was a slight, but not too significant, improvement on the average house price growth of 2011 which measured a lesser 3.3%.
However, in real terms, when adjusting house prices for consumer price inflation, 2012 continued to show mild real house price decline to the tune of -0.6%, which was a lesser decline than the real decline of -1.7% in 2011.
In real terms, the FNB House Price Index remained well-above levels of early last decade, with the real price average for 2012 still 70.7% above the real average price for 2001.
In nominal terms, the 2012 average price was 218% higher than the 2001 price level. Therefore, as at 2012 both real and nominal price levels remained still far above the pre-boom levels of early in the new millennium.
The end of the major strike disruptions of late-2012 should lead to some better economic growth quarters early in 2013. However, the reality is that we have approached and gone into 2013 on a very weak economic footing, suggesting that the early stages of this year could be a relatively soft period for house price growth. As such, we expect house price growth for the year 2013 as a whole to be slightly more subdued than 2012, and pencil in nominal average rise of 2.5% for the year.
Given that consumer price inflation looks set to be more around 5 to 6% this year on average, that would imply further “downward correction” in real price terms (when house prices are adjusted for CPI inflation).
Certain key issues remain similar to recent years. They include:
• Ongoing financial pressure for many households, an overhang of the credit boom of last decade, which would lead one to expect that the search for affordability in housing remains priority for many.
• Above-CPI inflation rises in municipal rates and utilities tariffs are set to remain problematic for home owners, and this can also exert some pressure on house prices, especially on the higher priced and larger sized end of the market.
• While further economic weakness can lead to further interest rate reduction, recent years have suggested that the Reserve Bank is reluctant to cut, and any downward movement in rates (such as the lone rate cut in 2011) is likely to be almost insignificant.
Finally, the upside of expected very low price growth in 2013, for future aspirant investors at least, is that we would expect yields on housing to broadly increase further, as they have been doing gradually since after the boom years, slowly improving property’s attractiveness as an asset class.