Real house prices expected to continue decline in 2013 ... or are they???

Far be it for me to contradict an esteemed property economist such as John Loos ... but I respectfully disagree.

In my humble opinion, house prices are driven almost exclusively by one factor - SENTIMENT.

In the boom stage, house prices were rising at up to 40% a year and speculation was rife.  In this aricle, you will see a decline in house prices (in real terms) over the last few years.  Was the land, the bricks and mortar, the fixtures, fittings, tiles and sanitaryware really worth 40% more in one year and 2% less in another year?  Was the value of his shelter any less valuable to the occupier the dwelling?

No - the house prices were driven solely by market sentiment (assisted by over zealous lending by financial institutions).
I would obviously make a lot of money if we could predict market sentiment but at least I can identify flags (in the terminology of Clem Sunter).  These are indications of what might happen.

The flag for the decline of the SA Property Market was the events in the USA surrounding sub-prime mortgages, Fanny Mae and Freddy Mac, and the collapse of the US Property Market.  It would therefore appear to me to be logical that the most important flag for the recovery of the SA market will be an improvement in the American market.  There are already indications of just such an improvement in the USA.

Obviously, there are other flags that could bring the whole thing down (e.g. the Euro Debt Crisis, tensions in the South China Sea, a drop in Chinese growth, etc.).

Let me be clear, I don't expect a spectacular recovery but I don't see a decline either.

Gareth Shepperson

Real house prices expected to continue decline in 2013

Average house prices rose 5 percent year on year in 2012, which was a slight improvement on the 3.3 percent growth achieved in 2011, but the rate is expected to slow this year because of weak economic conditions, according to FNB.

John Loos, a household and property sector strategist at FNB, said yesterday that nominal house prices were expected to increase by an average of 2.5 percent this year.

Given expectations of consumer inflation of between 5 percent and 6 percent this year, this would imply a further "downward correction" in real house prices, he said.

Real house prices, the increase in house prices adjusted to take inflation into account, declined by 0.6 percent last year, but this represented an improvement on the 1.7 percent real decline in 2011.

Loos said the broad "downward correction" in real house prices had continued for much of the period since 2007.

But Loos stressed that the FNB house price index in real terms remained well above the levels achieved early in the last decade, with the real price average for last year still 70.7 percent higher than in 2001.

In nominal terms, the average house price last year was 218 percent higher than the average price level in 2001.

Both real and nominal house price levels last year therefore remained far above the pre-boom levels of early in the new millennium, he said.

The average price of homes sold last year increased to R845 106 from R804 536 in 2011.

Loos said the biggest contribution to overall house price growth last year was made by economic conditions late in 2011 and in the first half of 2012.

He said the country was entering the new year on a much weaker economic footing than last year, with gross domestic product (GDP) growth slowing to 1.2 percent in the third quarter as the rate of global economic expansion continued to be pedestrian and large scale domestic strike action disrupted economic output.

Loos said various industry surveys suggested the fourthquarter growth rate might have deteriorated even further.

He said key issues remained similar to recent years, including the financial pressure on many households, which was an overhang of the credit boom of the past decade and meant the search for housing affordability would remain a priority.

Above-inflation increases in municipal rates and utilities tariffs were also set to remain problematic for homeowners.

Business Report


Denny Crane

Denny Crane
It's not me ... yet. Denny Crane from the TV series Boston Legal. Click on picture if you're not sure who he is!