Absa senior economist Jacques Du Toit said the decline was expected to continue well into this year. The rate of nominal house price growth peaked at more than 35% in September and October 2004 and has since declined steadily.

 Absa said house price growth was still strong compared with 2004. It said average growth in house prices in the middle segment of the market was 21,9% in 2005, compared with 32,2% in 2004. The middle segment refers to houses 80m²-400m² in size and valued at up to R2,2m.

The bank said the average house price was about R700200 last year compared with R574200 in 2004, and prices averaged R738900 in December.

Du Toit said the ratio of household debt to disposable income, at a record high of 63,4% in the third quarter of last year, was expected to rise to 67% year-end.

He said residential property contributed to increasing debt levels, with mortgages being the biggest component of domestic private sector credit extension.

Mortgage advance growth, at about 27% last year, should remain relatively strong this year, albeit at a lower rate of 20%-22%.

But Du Toit said the bank did not foresee a debt-to-income ratio of almost 70% becoming a "major critical issue" because interest rates were expected to remain low this year.

"In view of this we believe households will be able to control their debt because real household disposable income growth of about 6% is expected for 2006."

Adrian Saville, chief investment officer at Cannon Asset Managers, said residential property remained an "overvalued asset class" and that it was vulnerable to an interest rate increase, although the risk was low.

Saville said the level of South African household debt was still below average compared with more advanced economies and there was room for household debt to continue to rise.

"But if you compare household debt to South Africa’s own historical levels, then we sit at a very stretched level," said Saville.

He said the danger was if interest rates moved upwards, but conceded that most recent statistical data did not suggest an interest rate hike.

"If anything the available data suggest rates should fall because inflation is very low, money supply growth is slowing and private sector credit extension is slowing," he said.

Saville said the rand also remained strong, which placed pressure on manufacturers and the agricultural sector.

These sectors, which make up 20% of gross domestic product, were large employers and a rate cut might make the rand a bit weaker and ease the pressure on them.

"There are lots of reasons to argue for a rate cut. When you read it in that light it is safe to suggest 2006 will be a year of stable interest rates. Although household debt levels are high, they are sustainable as long as a benign interest rate environment remains," he said.

Property economist Erwin Rode said the slowdown of house price growth was "still on track" but that the annualised month-on-month price growth was still "relatively robust" at 9,4%.

"The housing market is by no means dead," said Rode. But he expected a static property market by the end of this year, with annualised month-on-month growth of close to zero by year-end.