What is happening with house prices, and is there a bubble risk?

What is happening with house prices, and is there a bubble risk?

With inflation and interest rates on the rise and an expected slowing of demand and sales volumes, the question arises as to whether there is a risk of a housing bubble and the potential impact on property prices.

A housing bubble is typically associated with rapidly rising house prices to the point where they are no longer sustainable and where declining demand triggers a fall in prices as seen in the USA when the Global Financial Crisis struck in 2008.

Compared to international housing markets which experienced growth upwards of 18% to over 20% over the last two years, the SA market only reached around 6% to 8% at best. Seeff Property Group Chairman, Samuel Seeff, says that the lower than expected house price growth has in fact acted as a barrier against the forming of a bubble.

A key feature of the SA housing market since mid-2020 has been relatively low price growth despite record sales volumes. Prices rose by just 4.2% in 2021 and growth has now slowed to around 3.23% according to Lightstone.

Even with the rising inflation and interest rates in the primary international housing markets, prices continue rising well above those of SA. The USA is for example still growing at around 17%, Australia at 11.7% and the UK at 16%.

Even the best case scenario such as Cape Town for example only averaged growth of around 6.7% in the 2021-year which was a boom year for sales. This has slowed slightly for the first half of this year to 6.21% and is expected to slow further as the effects of the higher inflation and rising interest rates take effect.

While the late 1990s and early 2000s were characterised by house price growth in SA of around 20%, the market only reached around 10.3% and 9.4% respectively in the 2016-2017 years when there was a previous boom in the market.

While serving as a barrier against a housing bubble on the one hand, the low house price growth has also kept prices sustainable which means that sellers do not end up facing wide scale price reductions despite economic deterioration.

On the upside, Kevin Lings, Chief Economist from STANLIB, presenting at the annual Seeff Convention, described the SA housing market as undervalued broadly speaking, precisely because price growth has been rather muted over the last 10-plus years.

This in turn presents excellent investment value for buyers. The Cape Town property market continues to surprise on the upside, boosted by the renewed upswing in semigration and return of international buyers. Our expectation is that prices will hold steady and well-priced property will continue being in demand.

Given the global economic uncertainties, we would suggest that those who are looking to sell right now should not wait too long because we simply do not know with any certainty what the market might look like by next year. The uncertainty is exacerbated by the prolonging of the Russian War in Ukraine and resulting impact on oil and food prices as well as the impact of continued Covid lockdowns in China which hamper supply.