June 7, 2004

By Roy Cokayne

Pretoria - The phenomenal increase in property prices would only have a limited upward impact on inflation figures, according to economists.

This was despite the latest Absa house price index released last week showing that house prices, after taking the effect of inflation into account, grew by 24.1 percent in April this year compared with 23.6 percent in March.

Dennis Dykes, Nedcor's chief economist, said only rental inflation was pushed up by the increase in property prices.

"If property prices are going up, rentals will increase. But there is no index in the CPI [consumer price index] for the property itself.

"Property is seen as an asset rather than a consumable, so an increase in property prices wouldn't push the CPI or CPIX [CPI excluding home loans]," he said.

Dykes said the rationale was that if you had bought a house four years ago, the fact that the price had gone up by 100 percent did not affect your cost of living, but it did make a big difference to your wealth because the value of your house had increased.

"You can't push through property price increase to the CPI because it's not accurate for the vast majority of people. The vast majority of people are already in the market.

"If you're entering the market, it's a bit rough. It [the increase in prices] could affect an individual's position quite substantially."

Dykes added that the mortgage bond component in the CPI focused on the interest rate only so in terms of affordability "it does not give the full picture".

Tony Twine, a director of Econometrix, echoed this view, stating that increases in property prices did not filter through to the CPI figures because the price of dwellings did not appear as an item in the consumer price basket.

However, Twine said what was consumed was rental, which was included in the CPI basket.

"Sooner or later rentals should respond to the investment price of the unit, so to that extent rising housing prices will come home to roost," Twine said.

Twine added in the base of the CPI, the authorities would measure the amount of money spent on mortgage interest payments and would then reflect that as a percentage of total household spending, which worked out at 11.8 percent of the all-items CPI basket.

In future monthly measures of the price of mortgages, they would escalate that portion of the basket by the interest rate and not by anything else, he said.

Twine added that the fact that the price of property was rising or falling was therefore "by the by" until the measurement or weighting of each item of the next base for the CPI was recast, which took place every five years.