South Africa has a history of high inflation. Inflation targeting has successfully brought inflation down to low single digits since 2003. Up until 1993 and at least since 1982, CPI inflation rates were actually double digits. Historically we have seen an inverse relationship between inflation and house prices. When inflation was high, house price growth was low. When inflation was low, house price growth was high.
If we look at the BRIC countries, China’s official inflation rate currently is 5.1% in December 2010, up from 1.5% at the beginning of 2010. India’s inflation is about 7.5%, but is expected to rise further since food prices are surging at double-digit rates. Brazilian inflation was 5.91% in December, Russian inflation is currently running at 8.8%.
South African December 2010 inflation: 3.5%.
With inflation currently so low, and with other emerging markets being at a higher level and rising fast, it is highly likely that SA will not be able to keep inflation at the current level.
It will be interesting to track how inflation affects nominal house price growths over the coming months and years as the new property cycle unfolds. If inflation rises again, we can expect to see a further dampening affect on property prices in the near-medium term.