Comments from ABSA



Absa reports that in the second quarter of 2006, nominal house prices in the middle segment of the SA market (houses of between 80m² and 400m², priced at up to R2,6 million in 2006) increased by an average 14,3% year-on-year (y/y) to about R792 600 (16,4% y/y growth recorded in the first quarter). The 14,3% y/y increase was the lowest nominal growth recorded by the bank in any quarter since the first quarter of 2002, when a growth rate of 13,7% was recorded. In the category for small houses, year-on-year nominal price growth bottomed at 13,8% in the fourth quarter of 2005 and has since increased to 15,2% and 16,7% respectively in the first and second quarters of 2006. Nominal year-on-year growth in house prices in both the medium and large categories continued to trend downwards in the second quarter. The rising trend in the price growth of smaller houses in the first half 2006 Absa ascribes to the fact that housing, in general, has become less affordable in recent years, shifting the focus to smaller properties. “This is regarded as one of the contributing factors to changing residential living trends away from big, single-stand properties to smaller, higher-density properties in security villages and complexes, especially in the major metropolitan areas around the country.” Other indicators also currently point to a slowdown in the housing market. The number of days properties were listed before being sold almost doubled between early 2004 and mid-2006, while the difference between asking and selling prices also increased significantly over this period. According to residential building statistics published by Stats SA, the growth in plans passed for new houses, flats and townhouse, as well as the growth in the number of these residential buildings completed, continued to decline in the first half of 2006. CPIX inflation accelerated in the second quarter of the year on the back of a weaker rand exchange rate, an international oil price that remained above the $70/barrel level and higher food price inflation. CPIX inflation is projected to rise further to about 6% by the end of 2006. Against the background of these inflationary pressures, interest rates were hiked by 100 basis points in total since June and are forecast to rise somewhat further towards year-end. Absa expects a 50 basis points increase at each of the remaining Monetary Policy Committee meetings in October and December this year. This will bring the prime interest rate and the variable mortgage interest rate to 12,5% at year-end. Interest rates are expected to remain unchanged in 2007 in an attempt to keep inflation under control. As a result of these expectations, house prices are projected to increase by around 12% y/y in nominal terms this year and about 8% in 2007.