Nominal house price deflation is set to continue for the rest of 2009, starting to slow down towards the end of the year, Absa said on Tuesday.

House prices were forecast to decline by about 3.5 percent in nominal terms this year after growing by 3.7 percent in 2008, Absa analyst Jacques du Toit said in the bank's latest housing review.

In real terms (where the effects of inflation have been factored in) prices were set to drop by around 10 percent this year, taking into account projections for consumer price inflation and nominal price growth.

This would be the second consecutive year of lower real house prices, Du Toit said.

"The lagged effect of lower interest rates and a moderate recovery in the economy later this year are factors which will contribute to an expected gradual improvement in residential property market conditions from early 2010," he said.

The average nominal price of affordable housing increased by 1.6 percent year-on-year in the second quarter of 2009, compared with price growth of 3.7 percent year-on-year in the first quarter, Du Toit noted.

In real terms prices declined by 5.8 percent year-on-year in the second quarter.

According to Du Toit, middle-segment house prices dropped by a nominal 3.9 percent year-on-year in the second quarter of the year, after declining by 1.9 percent year-on-year in the first quarter.

In real terms prices dropped by 10.9 percent year-on-year in the second quarter, after declining by 9.5 percent year-on-year in the preceding quarter, he said.

The affordability of housing improved further in the first quarter of the year, based on the ratio of house prices and mortgage repayments to household disposable income.

"However, in view of current economic conditions, which impact many consumers, few households are in the position to take advantage of the improved affordability of housing," Du Toit said.