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Latest South African property news

The drivers of house prices revisited

The normal short-term factors that drive house-price inflation are economic growth (real growth in disposable household income) and interest rates, as both affect affordability. Economic growth also tends to create new jobs, which boosts the demand for housing, and if the supply side (new developments) cannot keep up, prices accelerate. In a booming economy, this lag time is a real problem as the gestation period of new residential estates is about four years.

A long-term driver is construction costs. The reason for this is the substitution principle. If the prices of existing houses rise to levels where it is cheaper to build new, the potential buyer might choose the new build. Thus, the cost to build new keeps the prices of existing stock in check.

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