If you chart real house prices in South Africa v repayments one can see how the 2000’s property boom differs to what happened in the 80’s.
Quoting Absa’s C Luus from his 2003 publication: http://www.bis.org/publ/bppdf/bispap21l.pdf
“The early 1980s saw a massive loss of confidence in the dollar and concerns about spiralling inflation in most of the developed world. Consequently the gold price boomed, reaching a high of $676 on average during September 1981, which had huge positive spin-off effects for the South African economy. At that stage, income from gold exports constituted nearly 50% of total South African export revenue. Rising incomes and a reduction in tax rates considerably boosted households’ net wealth position. Improved liquidity conditions even facilitated a reduction in mortgage lending rates” in 1979 through 1980.
“However, the good times were about to end when the gold price pulled back and interest rates started to increase. The property market held up quite well during 1981 through to 1983, peaking in the first quarter of 1984. But severe pressure on the balance of payments, which sent mortgage rates soaring, together with increasing political pressure from both domestic and foreign sources, caused the property market bubble to burst. During the period from mid-1984 until the end of 1987, house prices declined by no less than 42% in real terms.
From the end of 1986 through to the end of 1991, house prices simply kept pace with inflation. In 1992/93, confidence suffered a setback owing to uncertainty about the political future of the country. With the advent of the new democratic order in April 1994, confidence was restored and house prices recovered somewhat. However, an ongoing exodus of skilled managers and professionals during much of the 1990s served to keep the property market under pressure.
Only in 1998 did the market start to recover on the back of lower inflation and interest rates, higher economic growth, and a much improved fiscal situation. Unfortunately, contagion effects from the Asian crisis caused a massive fall in the value of the rand, which once again caused interest rates to soar by some seven percentage points during 1998. By late 1999, the situation had more or less stabilised, and the house price boom resumed. By mid-2003, house prices had nearly doubled in nominal terms from their early 1998 values.”
If you look at the chart of real house prices v repayments (at constant 2008 prices), when interest rates rose to 24% in the 80’s they forced repayments of an average real R705,786 house in December 1984 on a 20 year mortgage to R14,238 per month.
That was not sustainable, and property prices crashed back to a real R452,116 by December 1986 and repayments of R4,978. So, what does an average house in 2010 at a real price of R921,513 and interest rate of 9% (at constant 2008 prices) cost on a 20 year mortgage? R8,291 per month. Clearly a very different scenario to 1984, although still fairly high.
What if interest rates returned again to 24%? Then repayments on the same average house today would be R18,590 per month! Again, that would be unsustainable and property prices would crash very quickly in the same manner as 1984.
But that is not the case currently, low interest rates are holding repayments down while keeping property prices higher.
Any interest shocks in the future, though, will have a big impact on the stability of future house prices.
Annual average real house prices are plotted against interest rate movements for that year. Where the interest rate moved more than once in a particular year, the average house price is plotted against the last movement for the year. For interest rate history in South Africa click here.