The property sector is coming under a huge amount of strain with inflation and interest rates biting into prices.

Bruce Whitfield:
Looking at Cape Town property papers over the weekend, in the Weekend Argus, I felt I needed a small truck to get them from the shop to where I was staying, certainly lots of property on sale in the Western Cape but looking at areas around Johannesburg that I frequent as well, lots of for sale signs are up as well, so is the property market in a downward spiral as suggested by a headline on Fin24 today or simply seeing a healthy pullback? Sizwe Nxedlana is economist at Standard Bank and Sizwe, you do lots of research into the property sector, there is no doubt that it is under a huge amount of strain.

Sizwe Nxedlana:
Yes Bruce, we saw the median house price decline to R530 000 for April 2008 which when compared to the same month last year is consistent with a decline in the year-on-year growth rate of -8.6 percent year-on-year.

Bruce Whitfield:
So the average South African house price is down nearly nine percent year-on-year. Now to me, that is a big fall in house prices but we like to forget I suppose that the previous five years saw property prices in some areas triple in certain cases.

Sizwe Nxedlana:
Well Bruce, first of all one should not take the point estimate at face value. First of all, what you need to do, there are some caveats around the point estimate that suggest that we may be over estimating the extent of the decline in the median house price in terms of the year-on-year growth rate. So what happened last year is that there was a high base effect which was established when market participants were trying to prevent the introduction of the NCA so that incentivised a lot of people trying to conclude pricier home deals in anticipation what would happen post the implementation of the NCA so that created a high base effect from which the currency year-on-year growth rate currently is being calculated.

Bruce Whitfield:
Okay Sizwe, let me just push pause there for a second and just see if I can explain that in slightly simpler terms; before the implementation of the National Credit Act I may have qualified for a home loan of two-million rand, post the National Credit Act I might only have qualified for a home loan of R1.2-million and therefore I try to get my two-million rand home loan through the system before the NCA was implemented and as a result average house prices actually looked a lot higher last year than perhaps they were.

Sizwe Nxedlana:
Yes so we saw a surge in the median house price during that time which then created quite a high base so now when you are comparing the somewhat more moderate level of the median house price to the elevated one last year you end up with these negative year-on-year growth rates but notwithstanding that any attempts to correct these distortions still yield either slightly positive or slightly negative numbers so the overall trend recapping the fact that we have moved from annual average growth of 32 percent in 2004 to 25 percent 2005 to 8.3 percent last year the overall trend is still reflective of the substantial headwinds that are inflicted on the South African consumer at the moment.

Bruce Whitfield:
Sizwe forgive me for pushing this point but if we look at the property market then is it down nine percent or is it not? I mean how do I as a property owner somebody who might be keen on selling a property in the not too distant future get an idea as to what the real value of my property might be?

Sizwe Nxedlana:
Look our median house price is just a gauge, a proxy measure for overall trends in the residential property market. You have heard that all residential property is local so we are as yet unable to clear our home loan book given that we are 30 percent of the market, we are unable to aggregate it by price and by geography so that we can't pinpoint the exact deterioration at a city level or at a provincial level, the subnational level, but we feel that it is a pretty useful measure for trends in the country as a whole and as I have said already if you try to correct for the distorted impact of the high price that we saw last year you know it is still indicating to us that there has been a substantial slowdown in some areas possibly even house price deflation particularly when compared to a year or even 18 months ago.

Bruce Whitfield:
Can you tell us which segments have been worst affected do you think?

Sizwe Nxedlana:
Well we saw the segments that have been worst affected are sort of the more interest rate sensitive segments. What we have seen is we have seen a compression of the distribution of our home loans book and an inward shift so that is telling us that people are shifting downwards in terms of the value of property they are buying but that also there has been a substantial reduction in the volumes. Now if you try and just aggregate by quarter we see that the lower quarter is the one that has been suffering the most given the fact that those are probably new entrants in the market that were probably not as financially sophisticated such that they didn't factor in a 450-basis-point increase in interest rates or did not foresee the fact that their cost of living would have increased so much over the past 18 months.

Bruce Whitfield:
And the interest-rate cycle far from over perhaps.

Sizwe Nxedlana:
In our house view we still foresee another interest rate hike in June given now the fact that we have had these surprises where previously we expected a peak to come in March this year and then for CPIX to reach the band sometime during the fourth quarter of this year. Given the shock through the oil price and weaker exchange rate we still foresee inflation coming back within the target band but our view is now also in line with those of the SARB, we still foresee inflation coming back to the target band during the second half of next year in which case with upside that the threats of the possible Eskom electricity hikes so that sort of tells you that there is upside to the interest-rate outlook, our best guess is 50-basis-points, but we foresee the first cut in the second half of next year.

Bruce Whitfield:
Sizwe, we have got to leave it there, Sizwe Nxedlana, he is the economist at Standard Bank.