Residential property faces price deflation

HOUSE prices continue to decline due to a sizeable oversupply that has built up in the residential market, FNB said yesterday.

HOUSE prices continue to decline due to a sizeable oversupply that has built up in the residential market, FNB said yesterday.

Its latest house price index continued to decline in May to -11,3percent year-on-year.

This represented a deterioration on the revised-9,2percent rate of year-on-year decline recorded for April.

It was also the sixth consecutive month of year-on-year decline in the house price index, FNB said.

On a month-on-month basis, the rate of deflation was minus three percent in May.

The deflation was a result of oversupply, with selling because of financial pressure being a key driver of supply, FNB added.

"With South Africa officially now in recession, economic conditions are hampering the pace of residential demand growth despite a series of interest rate cuts," John Loos of FNB said.

Domestic interest rates had now declined by 450 basis points in total since the start of the rate cuts in December last year.

"This should bring some stimulus to a very credit-sensitive market such as the residential property market.

"However, unlike the 2003 aggressive interest rate cuts, which took place in good global and local economic times, the current stimulus from interest rates is to a great extent offset by an economic recession which contains growth in household purchasing power," Loos said.

As such, the expectation of nothing more than a very mild improvement in residential demand during 2009 continued, and with oversupplies still believed to exist on the market, house price deflation was expected to be around for most of 2009, Loos added.

"However, the worst year-on-year price deflation will show in the figures around mid-year," Loos said. - Sapa

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