South African property prices have risen fast over the last two years, but that rise is now thought to be slowing, according to Fitch Ratings’ latest report.
South Africa saw 10% year-on-year growth each year since 2012, but the South African economy is expected to experience a slowdown in 2014, and a fall in the average household’s disposable income is expected to result in a corresponding drop in demand.
Another weight pulling the South African market back down to earth is the burden of defaulted loans; banks have still to complete the process of working out these loans and to sell the related properties.
Fitch also expects interest rates to rise, which will add to the uncertainty of future gains in house prices. Inflation has run at an average 5.4% since 2011, and the rand was recently sharply depreciated against the US dollar, falling by 23% between January 2012 and November 2013. This is expected to lead the South African Reserve Bank to tighten its monetary policy. That might look like good news for the housing market but it needs to weighed against expectations of slow economic growth over 2014.
The report states that the ratings company ‘expects nominal housing appreciation to slow down to approximately 6% a year over the next few years, in line with inflation.’
Although South Africa has experienced two years of high house price growth, and is expected to see relatively healthy growth this year too, housing affordability remains good. Affordability is always an issue in house price booms because the inability of local residents to afford housing has both social and economic effects which are undesirable. In South Africa, though, affordability is now better than it was in the 2006-7 years. This is a relative statement: affordability is good for South Africa. There is a general underlying affordability problem in the country, and the country’s elevated house price to income ratios show how few South Africans can afford a mortgage.
Fitch says it expects affordability to remain steady over the next few years, while housing appreciation slows down and any rise in average disposable incomes remains slow.
Mortgage rates in South Africa are typically linked to the prime rate, a reference index which follows the South African Reserve Bank’s auction rates. The SARB last reset its auction rate to 8.5% in 2012, and it is currently at its lowest since the mid-1970s.
Mortgage performance is expected to remain fairly steady in 2014. It has kept an even keel since 2011, following the peak in defaults experienced in 2008 and 2009, and it’s expected to be stable this coming year, with the National Credit Regulator foreseeing ‘some uncertainty regarding the future pace of these settlements, as the least attractive properties may still have to be sold.’ Between the risk posed by an increase in interest rates, the sluggish economic growth forecast and the shallowing out of the defaulted loan stock, South African property’s rise may not stop, but we can expect to see it slow down substantially.