Business Day Posted to the web on: 14 March 2007
Buoyant homes sector unbowed by rates rises

RISING interest rates will not necessarily affect the residential property sector negatively as relatively high confidence levels, a strong economy and an emerging black middle class continue to buoy the market.

That interest rates might not have as powerful an effect on the residential market as many expected was illustrated last week when Absa Bank reported that last month’s nominal house price growth was 15,4% year on year in the middle segment of the market, which was in line with a revised growth rate of 15,4% in January. On average, the price of a house in this segment of the market was about R891700 last month.

Absa, SA’s largest home loan lender, expects price growth to level off later this year as overall inflationary pressures could cause interest rates to increase further, but says price growth is still healthy.

Absa senior economist Jacques du Toit said although people had perhaps shifted their focus to smaller and cheaper properties, demand for property was still obvious.

Nominal growth of 15,2% in house prices was recorded for the whole of last year. Absa is expecting growth to be a bit lower this year.

Samuel Seeff, chairman of real estate group Seeff Properties, says he believes house price growth will be stronger than 15% “rather than less”.

“We have already had indications in higher-priced areas. Prices have gone up beyond the 15% mark over the December-January-February period. Traditionally, February is always our greatest selling month, and this year was no exception.”

Areas such as Bantry Bay in the Cape Town area were fetching prices of R65000/m² to R70000/m² for a new development.
“There were also record prices in the adjoining Clifton area, which indicates to me that as the top segment of the market gets more expensive, the rest of the market will move upwards in order to achieve the same ‘relative value’.”

He says there is strong demand for property as a result of SA’s strong economy. “A lot of people have made a lot of money over the last few years in a robust economy. Many of them are taking those gains and investing them in property as an asset class.”

The emerging black middle class has created demand for property that did not exist previously with the result that prices are being forced upwards. “With the demand in the construction industry so geared to the building of infrastructure for 2010 Soccer World Cup, the Gautrain and power stations, so the cost of building has gone up greater than inflation and ensured that either the replacement costs or new buildings are more expensive. But the rest of the market moves up in sympathy.”

Seeff Properties does not believe interest rates have slowed the market down. “I think the (interest) rate on average is still significantly lower than the average rate over the last 10 years and as such, South Africans are comfortable with this rate, and are entering the market, notwithstanding the higher interest rates.”

Ronald Ennik, MD of Pam Golding Properties in Gauteng, says the property cycle is a “little bit different” in Cape Town because of an increase in interest in that market over the December-January period from foreigners and “visitors from upcountry”. The rest of the country is a “lot quieter over that period”.

“We are still finding that the top end is trading, but is not as buoyantly as the other sectors of the marketplace. I really feel that the same patterns from last year will repeat themselves this year. The top end will still be slower than 15% whereas the middle market, which includes prices around the R2m bracket, will continue to surge above 15%.”

He says the property market does “not move” on interest rates alone. “It moves on sentiment and confidence levels. Those still remain high in the retail sector and other economic sectors in the marketplace, with gold doing well and the oil price not as high as expected These are positive indicators in the economy.”

Pam Golding Properties reports that in 1989, interest rates were at 23% and that the residential price growth was increasing at 35% a year. At that stage inflation was at a high 17% a year.

Herschel Jawitz, CE of Jawitz Properties, says that generally the residential market is active and that demand is “positive” at the lower, middle and upper price ranges.

“I think interest rates make an impact in a number of different ways. There are people who might have been scared out of the market. But, generally, people will either buy something cheaper or may finance a lesser portion if they have cash available.”

In 2002, when interest rates rose from 12% to 17%, there was little effect on the residential market. Jawitz says he believes the market is seeing the same phenomenon. “People felt that the market had a threshold of an additional 2% to 3% hike in interest rates. We have seen 2% and the market has held firm.”