South African Property Market

"The property party may be over, but the after-party is about to start, and high economic growth coupled with low inflation will continue to support the property boom for at least the next five years.

That's the word from Absa senior treasury economist, Chris Hart, who says the price of oil and interest rates will come down and that South Africa is about to experience an investment boom.

Hart was upbeat about the state of the economy and prospects for investors. "There are many factors which indicate investment conditions in South Africa are the best they have been for decades. In fact, the SA economy is on the verge of an investment flood," he said.

"We are about to enter a phase of sustained high-growth with low inflation. Structural growth is now possible and the recent Barclays/Absa deal will encourage other global entities to look at concluding similar deals. This will result in additional huge investment in the financial sector.

"The country will also see significant growth in terms of infrastructure expansion, including a second fixed-line telephone network and the preparations required to stage the Soccer World Cup in 2010."

Hart said the strong worldwide demand for commodities would also attract other multinationals to the region and further boost growth and development. And high economic growth coupled with low inflation would continue to support the property boom for at least the next five years, although the growth in property prices would slow down.

SA currently offered some of the best property investment opportunities in the world, he said, thanks mostly to the continuing demand for property in a transforming economy. In addition, personal incomes would continue to rise due to lower inflation and falling interest rates"

"Nominal house price growth of around 21% is projected for 2005 as a whole, based on growth of 23,4% in the first nine months of the year. Despite prospects of higher inflation towards the end of the year, house price growth in 2005 is forecast to be positive for the sixth consecutive year in real terms. In view of expected higher interest rates in 2006, the current declining trend in nominal house price growth is forecast to continue into next year, with the affordability of housing, especially for first-time and low- to middle-income home buyers, remaining an important factor over the next 12 to 18 months. As a result, single-digit house price growth of between 5% and 10% is projected for 2006."

A study in The Economist showed house prices in South Africa rose the fastest in the year to March. A recent article in The Wall Street Journal also placed South Africa in top spot over the past year and the past three years. According to The Economist, house prices in South Africa rose nearly 24 percent between the first quarter of 2004 and the first quarter of this year, beating Hong Kong, at second place with a 19 percent rise. Next on the list were Spain and France with 15.5 percent and 15 percent respectively.

Since 1997 South African house prices have leaped by 244 percent. Ireland is next in line with a price increase of 192 percent. ABSA research found that prices of houses in the so called mid-segment - between 80m2 and 400m2 and priced up to R2.2 million - rose by an annual rate of 28 percent in the first quarter of 2005.

In South Africa many investors have entered the buy-to-let market in the past few years. This has already led to income yields on rental properties coming down considerably, in many cases to below 5 percent. Despite the pressure on the local buy-to-let market, property experts agreed that the residential property market would remain intact, as long as economic growth kept on chugging along at its present levels. South Africa was different to international markets in that it had an emerging black middle class driving the house market. ABSA has forecast nominal house price growth of 15 percent to 20 percent for the year compared with last year's more than 30 percent rise."

"It's easy see why there is so much foreign interest in Cape Town. The cosmopolitan city enjoys a balmy Mediterranean climate, and stunning beaches with the amazing backdrop of Table Mountain. Drive (on the left hand side - very civilised) an hour from town and you can visit any number of vineyards or beautiful gardens. Stay on the coast and go kite surfing, whale watching, or swim (in a metal cage) with great white sharks. But the ultimate appeal for anyone looking for a decent return on their investment is the cost of property if you look outside the most fashionable areas of Clifton and Camps Bay."

(Source: The Observer - Money September 14th 2004)