Downward trend in South African property price growth continues - 4 October 2007

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According to the latest Absa House Price Index, the average price of middle-segment housing (see explanatory notes) increased by a nominal 14,2% year-on-year to R950 000 in September 2007 (14,8% in August). In the first nine months of the year, nominal house price growth averaged 15,3% compared with the same period last year.

Real year-on-year growth in house prices of 7,6% was registered in August, unchanged from July. In the first eight months of 2007, real growth in house prices averaged 8,3% year-on-year. The real growth rate is based on the headline consumer price index (CPI). On a month-on-month basis, nominal house price growth slowed to 0,6% in September (0,8% in August). In real terms, house prices increased by 0,3% month-on-month in August
after a drop of just 0,1% in July.

Domestic inflationary pressures eased somewhat in August, with year-on-year (y/y) CPIX inflation marginally lower at 6,3% from 6,5% in July. Producer price inflation (PPI) eased from 10,3% y/y in July to 9,4% in August, mainly as a result of a significantly lower inflation rate recorded in the domestic component of the PPI.

Although the latest inflation numbers appear to be positive for the interest rate outlook, both PPI and CPIX inflation remain under upward pressure from rising food and energy prices. Against this background, and also taking into account above-inflation wage increases recently negotiated in various sectors of the economy, inflation expectations will remain relatively high over the short term.

The Reserve Bank’s Monetary Policy Committee (MPC) meets again next week (10 and 11 October) to decide on the future course for interest rates. The view with regard to keeping rates either stable or hiking further is currently evenly balanced. While CPIX inflation is expected to remain above 6% for some time, the MPC may well decide to keep rates unchanged next week on the back of slowing domestic demand and credit extension. The full effect of previous interest rate hikes and the implementation of the National Credit Act is still to work through to the economy, which may prompt a pause in rates.

The growth in house prices is expected to taper off further towards the end of the year, with average growth for the full year now projected at a level of around 14,5%. Nominal house price growth for next year is forecast at about 10%, mainly as a result of the tightening monetary conditions since mid-2006, as well as slower economic growth expected in the second half of this year and in 2008.

Authored by: Jacques du Toit
Published by: Absa Group Economic Research

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