Interest rate cuts and demand lead to continued rise in nominal house prices

Nominal house prices continued to rise in the fourth quarter. Property economists Rode & Associates ascribe this to pent-up demand which was boosted by record low interest rates.

House prices grew 1.8% during the first 10 months of this year compared with the same period in 2019. Kobus Lamprecht, head of research at Rode & Associates, says in the report this implies the full-year price growth will slow for the sixth consecutive year in nominal terms.

In addition, this led to property prices declining in real terms, after stripping away inflation which has averaged 3.3% this year.

“We have our doubts about the sustainability of the current rising house prices given the negative effect of the weak economy on household finances, which could ultimately outweigh the impact of lower interest rates and lead to some forced selling, especially if interest rates start to rise again,” Lamprecht says.

The report notes that the 300-basis point cut in interest rates this year has enticed consumers to rather purchase property, which has affected the rental market negatively.

Official data from Stats SA suggests rental growth for flats was just over 4% nominally in the third quarter of 2019. This year it has slowed to 2%.

“It is very likely that rentals will come under more pressure in the near term due to high vacancies,” Lamprecht says.

In addition, office rentals have also taken a hit. Nationally, nominal market rentals for grade-A office space decreased by 4% compared with a year ago. Resultantly, this has contributed to nominal rentals declining 1.2% for the year, after growing 4% in 2019.

“The large and growing amount of available space is giving tenants the upper hand in lease negotiations, leading to benefits such as tenant installation allowances, cash payment, longer rent-free periods and lower rentals,” Lamprecht states.

In terms of performance, there is an oversupply of office rental spaces due to a weakening demand as offices begin to utilise more ‘work from home’ programmes, while the retail sector experienced lower year-to-year sales – a 9% decrease compared with 2019.

The industrial market

Despite rising vacancies, rentals in the industrial sector remained largely stable in the second half of the year. Lamprecht suggests this is mainly due to an economic recovery from the retail and manufacturing sector in the third quarter of 2020.

Rentals for a space of 500m² grew by 2% and 1% in Durban and the East Rand respectively. Meanwhile Cape Town and Central Witwatersrand saw nominal interest rates fall by 1%.

“No doubt, the strong and growing demand for logistics boosted by the growing popularity of online retail is also supporting this sector. The market appears to be on a much better footing than the office and retail property markets,” the report notes.

Moreover, the industrial market has seen an increased demand for new-generation warehouses or distribution spaces. Lamprecht says this can be attributed to a rise in online sales and the need for modern racking systems.

Building activity

Building activity in the property sector has increased since the effects of the national lockdown took its toll in April and May, but it still remains at a low level says Lamprecht.

“Despite the recent improvement, activity levels for the year so far are down substantially compared to 2019. We expect activity to recover further in the near term, but the medium-term is not so positive due to poor property fundamentals, such as high vacancy rates and the consequent depressed rentals,” he further notes.

* Michael Brown is a Moneyweb intern.