[ABSA is the biggest financier of home loans – so I doubt they would run around crying wolf! They want to preserve their own base as much as possible. There is nothing stopping us from experiencing a property bubble. Prices are ridiculously high. Maybe it just needs a few more years. Jan]

Johannesburg – Indications are that the South African residential property market is not generally experiencing bubble conditions yet.
According to Absa senior economist Jacques du Toit, however, it is quite conceivable that certain types of housing in certain areas of the country are experiencing bubble conditions.

This might result in the prices of those properties declining when the cycle turns.

In some areas, he points out, the buy-to-let market has been instrumental in driving house prices higher and any saturation of, and a massive sell-off in, this market could lead to either stagnating or weaker prices.

No interest rate cut

Taking into account recent trends in international oil prices and the rand exchange rate, Du Toit said, the Reserve Bank was not expected to cut interest rates further in 2005, mainly as a result of the negative impact these developments could have on inflation.

Du Toit said: “A gradual, increasing trend in interest rates is projected between mid-2006 and late 2007 in an effort to keep inflation in check.

“However, if an oil price shock occurs, together with a sharply weaker exchange rate, inflation pressures will increase significantly, leading to the risk of markedly higher interest rates.

“In the event of such developments, the housing market may experience a significant downward correction in terms of activity and price levels, taking into account present conditions in the market.”

Strong price growth

According to Du Toit, the South African residential property market had experienced strong price growth of about 20% a year in nominal terms and 13.6% a year in real terms in the past five years.

“As a result, an important indicator such as the ratio of house prices to the level of remuneration has increased significantly since 2000, but, towards the end of 2004, had not yet reached the peak of early 1984.

“An increase in this indicator implies that house prices are increasing at a faster rate than remuneration.

“The monthly measured rate of year-on-year growth in house prices began to taper off in mid-2004.

“In the fourth quarter of 2004, nominal growth averaged 34.2%, mildly lower than in the third quarter.

Declining year-on-year growth

“In the first and second quarters of 2005, nominal house price growth was respectively 29.2% and 24,8%.

“The monthly Absa House Price Index for June 2005 showed its eighth successive month of declining year-on-year growth, measuring 23.3%, down from a peak of 35.5% reached in October 2004.

“This declining trend in house-price growth since late last year can be ascribed most probably to fact that housing has become less affordable in general, taking into account the abovementioned trend in the ratio of house prices to remuneration,” said Du Toit.

Source: Finance24.com
URL: http://www.finance24.com/articles/default/dis…br>