That’s according to the newly-launched Lightstone Residential Property Price Indices, which show that after recording 33% in both 2004 and 2005, average house price inflation declined to 24% in 2006.

According to the Lightstone Indices, the cumulative house price inflation rate was 288% from 1999 to 2006.

The Lightstone indices differ from other property price indices in that they use repeat sales data from the company’s automated valuation model (AVM) to generate statistically sound, fully segmentable price trends for the South African residential property market.

The indices are the first of their kind to not only cover the national market, but to differentiate between a number of key sub-segments defined according to geography, property value and property type. These include provinces, major municipalities (metros), coastal and non-coastal, sectional title and freehold and average property price areas.

Lightstone MD Anthony Miller says the Lightstone Indices track the actual changes in individual house prices within each defined geographic area, and are therefore not distorted by changes in the mix of properties transacting during the period (like an increase in affordable houses being sold versus luxury houses).  

Lightstone uses the globally accepted repeat sales methodology to derive its residential property price indices. This method aggregates the observed price changes in actual residential property units that have sold at least twice within a specified period.

Speaking at the launch of the indices in Johannesburg, senior FNB economist John Loos said the new Lightstone indices underlined the volatility of the coastal market, which had seen meteoric growth between May 2002 and September 2005, but was suffering heavily in the face of high interest rates and sluggish markets.

“The slowdown is broad-based in terms of average price categories, with all four categories – Affordable, Mid-value, High-value and Luxury areas - all showing declining price inflation,” said Loos. “We now have data to support the conventional wisdom that the lower end of the market is providing better performance.”

All indications are that average house price inflation will still go lower in 2007, with the full interest rate effect yet to feed into the numbers. Household debt was still rising in excess of 20% as at the final quarter of 2006, translating into a further increase in the household debt-to-disposable income ratio.

This, coupled to the mild increase in interest rates last year, has seen the debt-service ratio for the household sector rise from a low of 6.3% at the end of 2003 to 9.2% at the end of 2006. The debt- service ratio is expected to go still higher, but is not yet problematic, and Loos believes that housing demand will continue to grow steadily as the economy and the middle class grows, despite the rise in household debt and debt servicing costs.

However, says Loos, the rental market only recently started showing signs of strengthening, and it is felt that significant further strengthening is required before the buy-to-let market improves. A further expected slowdown in supply of new stock in 2007, and high building cost inflation, is expected to combine with ongoing solid demand growth to turn the price inflation trend around (upward) at a stage in 2008.

From January 2000 to December 2006, Gauteng house prices rose by 283%, Western Cape by 275% and KwaZulu-Natal by 296%. However, Gauteng has also shown more stability. Where Western Cape price inflation peaked at 43% year-on-year in December 2004 and KwaZulu-Natal at 41.1% in October 2004, Gauteng peaked at 29.6% in February 2005.

By December 2006, Gauteng had also slowed less sharply, recording 17.6% to the Western Cape’s 15% and KwaZulu-Natal’s 14%. Of concern is the steepness in the pace of decline of KwaZulu-Natal during the last few months of 2006.

“Could it be that this market is far more sensitive to interest rate hikes than the other two major provinces? My feeling is that this is indeed the case,” said Loos. “However, the longer term prospects for the province are positive, with some exciting new developments in the pipeline.”