Smaller houses showing the strongest growth

Smaller houses are showing the strongest growth — this according to the latest Rode’s Report on the SA Property Market.

The report analyses FNB’s house price indices for different sizes of full- and sectional-title homes and finds that the prices of smaller houses are not only accelerating faster but are also showing stronger growth relative to larger houses. Erwin Rode, property economist and CEO of Rode & Associates, explains: “The prevailing low economic growth environment and the uncertainty it brings to household finances, as well as tight credit criteria of banks, might be forcing buyers to scale down ─ especially first-time buyers.”

Nevertheless, over the past year, a slight softening in the credit standards of banks seems to have buoyed house prices in general, which explains why they are, in general, again showing growth slightly in excess of inflation. However, headwinds in the path of house prices remain, for example weak growth in formal employment, waning growth in household after-tax incomes and still-high levels of household debt. What’s more, despite the Bank’s decision to keep interest rates steady at the September meeting, the Monetary Policy Committee remains of a view that interest rates will have to normalise again. That the consumer is under unrelenting stress, is confirmed by residential rentals that, according to Rode’s research, have been growing at about half the inflation rate.

Another key finding of the report was the moderate growth in the market rentals of office space. Commenting on this, Rode notes: “Nationally, contracting employment in the services industries, coupled with low business sentiment, continue to undermine the demand for office space to rent. The result of this has been vacancy rates that are unable to drop and market rentals that are showing sub-inflation growth.”

In the second quarter of 2014, market rentals for prime office space could — on a national basis — only show yearly growth of about 3%. A look at the regional picture shows no growth — on average — in market rentals in Durban decentralized, while in Johannesburg and Pretoria, rentals in decentralized nodes recorded growth of 2%. Cape Town decentralized was the star performer, with its growth in market rentals of 5%. In the reporting quarter, building costs are expected to have shown growth of about 4%, implying that Cape Town was also the only region where real rentals were — albeit only marginally — able to show growth.

During the second quarter of 2014, market rentals for industrial properties in the Cape Peninsula and on the East Rand were still able to show fairly decent yearly growth of 6%. On the Central Witwatersrand and in Durban, however, rentals could only put together growth of roughly 3%. As for rental growth prospects, the underperformance of the manufacturing and retail sectors of the economy does not bode well for the demand for manufacturing and warehouse space to rent. The likely outcome of this will be continued modest growth in industrial market rentals.

Source: Rode