Residential price growth in South Africa expected to slow in 2014
A gradual slowdown in house prices is expected in South Africa in 2014 after rises of 10% in 2012 and 2013, according to a new analysis report.
Although the demand for quality housing remains high, the expectation of subdued growth in both the South African economy and household disposable income may dampen house price progression, says the report from Fitch Ratings.
Meanwhile, banks still have to work out a significant volume of defaulted loans and sell the related properties on the market and the prospect of a gradual rise in interest rates by the end of 2014, as anticipated by Fitch, adds to the uncertainty on future gains in house prices.
‘Fitch expects nominal housing appreciation to slow down to approximately 6% a year over the next few years, in line with inflation,’ the report says.
It also points out that despite the house price gains of 2012 and 2013, housing affordability remains significantly higher than in the pre global economic crisis years of 2006 and 2007. However, only a limited share of the South African population can afford a mortgage, as reflected by elevated house price to income per capita ratios.
Fitch expects housing affordability to remain stable over the next few years, while housing appreciation slows down and the progression in disposable incomes remains subdued.
It explains that mortgage rates are generally linked to the prime rate, a reference index that closely follows the South African Reserve Bank's (SARB) auction rates. Last reset to 8.5% in the course of 2012, it is at its lowest levels since the middle of the 1970s.
The return of inflation, averaging 5.4% since 2011, and the recent major depreciation of the rand by around 23% against the dollar from January 2012 to November 2013, may lead SARB to tighten its monetary policy; these factors are nonetheless to be weighed against expectations for a sluggish economic growth.
Fitch expects a modest policy tightening by the end of 2014, adding that given inflationary and foreign exchange pressures, there is a risk of earlier rises in interest rates.
Mortgage performance has remained stable since 2011, down from the peak in defaults experienced in 2008 and 2009 and is expected to continue to be stable this year.
Statistics from the National Credit Regulator (NCR) also suggest a gradual work out of the stock of defaulted loans inherited from the crisis years. ‘However, there is some uncertainty regarding the future pace of these settlements, as the least attractive properties may still have to be sold,’ the report points out.
Fitch expects mortgage performance to remain stable in the near term, acknowledging nonetheless the downside risk posed by any substantial increase in interest rates.