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Three years of single digit growth ahead   Article Date :6 Sep 2005 ABSA forecast. The rate of house price growth is expected to fall dramatically from around 20 percent in nominal terms this year to below 10 percent for each of the next three years. That's the forecast from leading mortgage lender Absa in the first edition of its new Residential Property Perspective, in which it also predicts that CPIX inflation will rise to an average of 5 percent next year, from 4,5 percent this year, and cut into real-term property value growth. However, the bank points out, this does not mean that actual prices will decline. In fact, it expects that house prices in the middle segment of the property market (homes of 80 to 400sqm, priced at less than R2,2-million) will still show an average real or after-inflation increase of 3,1 percent next year. Absa says the major reason for the slowdown in price growth - which has already declined from 34,2 percent in nominal terms during the fourth quarter of 2004 to 24,8 percent in the second quarter of this year – is a decline in affordability over the past few years. The ratio of house prices to remuneration, an important measure of affordability, has increased significantly since 2000, and by the fourth quarter of last year was at its highest level since 1984. This reflects the fact that house prices have been rising at a much faster rate for the past five years than wages and salaries, making it more difficult for buyers to qualify for the finance most require to buy a home. This difficulty has been offset by falling interest rates since 2003, but that benefit has now largely worked its way out of the market because most wage and salary increases over the past two years have been pegged to low inflation. Absa's figures show that both the mortgage repayment and the qualifying gross income level for an 80 percent loan on an average price property were up 25 percent year on year in the first quarter of this year. This was down from 27,4 percent in the final quarter of 2004, but at the same time, growth in the real disposable income of households declined to 4 percent yoy, from 6,3 percent and 6 percent respectively in the third and fourth quarters of 2004. What is more, the ratio of household debt to disposable income had increased to 59,9 percent, its highest level since 1998, and well up on the 50,3 percent at the start of the property boom in 2002. In short, most households now simply don't have the means now to keep up with home price increases that are way ahead of the rate of inflation, no matter how much they might like to buy a new home. And their situation is not being helped by rising fuel prices and the fact that interest rates are expected to start rising from the middle of next year to keep inflation under control. Consequently, owners and developers keen to sell now and in the coming year are having to put a lid on their profit expectations, which will naturally slow down the rate of price growth over the next year – and probably keep it low for the next two to three years while wages and salaries catch up. Indeed, Absa forecasts that "with the mortgage interest rate currently expected to peak at 12,5 percent towards the end of 2007, house price growth in that year and during most of 2008 is also expected to remain in single digits". CLICK HERE TO RETURN TO THE MAIN NEWS PAGE