Property experts are expecting the South African residential property market to remain strong in 2005 but say the rate of growth in house prices will decrease.

They also expect to see an increase in residential building activity and a possible shift to renting of property as house prices become less affordable.

Property economist Francois Viruly, of Viruly Consulting, says that during the course of 2004 the excellent performance of the residential property market "broadened itself" beyond the major metropolitan centres to include smaller provincial towns.

Viruly says the residential market is unlikely to be driven by interest rate movements next year, since rates are expected to remain stable.

However, he says there remains a possibility of a rate hike next year.

Viruly says that one of the critical factors that will determine the property market's showing next year will be the performance of the macro economy.

"We will need to watch gross domestic product (GDP) growth and if we do meet forecasts of around 4% or 5% GDP growth, this should underpin and allow the present performance of the property market to continue in 2005," says Viruly.

He says that location will be increasingly important for property buyers.

But Viruly also says that a number of aspirant first-time homeowners will find that renting is cheaper than buying.

"That will be more a reflection of the oversupplied buy-to-let market where rentals are now becoming attractive because of oversupply," he says.

"We'll find ourselves at the end of 2005 with a residential property market which is pretty much in equilibrium . Prices will start coming down as affordability becomes an issue and the rental market improves."

Viruly says that he is not expecting a recurrence of the steep price increases witnessed in 2004, and is anticipating average increases in house prices of 15% 20%. According to the latest Absa House Price Index, nominal yearon-year growth of 35,1% was recorded in house prices in November this year.

Although house price inflation is likely to be lower, this would still give investors "very good returns in real terms", says Viruly.

According to the latest report on the South African property market by property valuers and economists Rode & Associates, homeowners will have enjoyed growth of 30%-40% in house prices in 2004.

The report says that growth in the value of lower-priced homes, which have been lagging behind the performance of middle and upper-priced houses for some years, continues to accelerate.

However, Rode & Associates says the recent residential property boom has not been good for everyone, due to its dampening effect on prices in the residential flat markets.

The group says that with the exception of Durban and Port Elizabeth, where flat rentals have grown faster than building costs, flat rentals have not even managed to outpace headline consumer inflation in most other parts of SA.

This could affect demand in the residential buy-to-let market, says the report.

But R ode & Associates expects prospects for the construction industry to remain bright, with the robust activity that building contractors enjoyed this year set to continue next year.

Garth Johnson, editor of the report, says he foresees that building activity in both residential and nonresidential property markets will boom next year.

"The continued buoyancy in the building industry, coupled with a shortage of skilled artisans, will lead to a further acceleration in building costs," says Johnson.

Absa Bank recently reported that the supply of new residential buildings, including townhouses, flats and houses, had not kept up with burgeoning demand.

The bank is also anticipating a small slowdown in the rate of growth in house prices next year, saying this month that it was projecting growth of about 20% for next year.

Absa said that with interest rates expected to remain stable next year, the affordability of housing would come under pressure, and that this would eventually affect the demand for housing and lead to a lower rise in house prices.

According to its house price index, residential property prices increased at an average rate of 32,4% year on year during the past 11 months.

As far as opportunities for property buyers are concerned, commentators say Eastern Cape, and in particular cities such as Port Elizabeth and East London, hold strong investment potential.

Eastern Cape is the fastestgrowing province in SA in terms of house price increases for the third quarter of this year, compared with the corresponding period last year.

The province recorded growth in house prices of 52,6% for the third quarter of this year compared with the year-ago period.

Business Day