KEEP UP TO DATE WITH ALL THE IMPORTANT COVID-19 INFORMATIONCOVID-19 RESOURCE PORTAL

FANews
FANews
RELATED CATEGORIES
Category Investments

Who knows?

17 October 2004 Angelo Coppola

Jacques du Toit, Senior Economist at Absa says that the South African residential property market has recorded strong growth since the beginning of 2000.

After a long period of mediocre growth in house prices from the mid-1980s up to the end of the 1990s, relatively strong growth in both nominal (more than 17% per annum) and real terms (about 11% per annum) was recorded during the past four an a half years.

As a result of the excellent performance of house prices during this period, the question has arisen as to whether residential property prices in South Africa have now become overvalued, indicating an imminent downturn in the property market.

One of the indications of the state of the residential property market is the comparison of the average price of new and existing houses in order to determine whether existing houses are overvalued in relation to new houses.

The rationale is that, once a new house can be built for less than the cost of buying an existing house, the market is set for a downward correction.

In this analysis, the price of a new house includes the construction cost of the building, the market value of the stand, as well as VAT and transfer costs. However, in most instances the price of a new house excludes  the cost of landscaping, which may be a couple of thousand rand.

The price of an existing house includes that of the building and the stand, including improvements to the stand, but excludes transfer costs.

At the peak of the property market boom back in the early 1980s, the price difference between new and existing houses had declined to almost zero at the time. Between 2000 and the second quarter of 2004 (a period of strong growth in the property market), existing houses were on average 26,3% cheaper than new houses.

This implies that existing houses have generally been below their replacement value during this period. However, the price difference has since declined to 20,1% in the second quarter this year after reaching an all-time high of 30,7% in the first quarter of 2003.

There are, however, analysts who believe that a comparison of prices of new and existing houses is meaningless, as the average house in South Africa is a few decades old, and that these properties have depreciated over the years through ageing.

In contradiction to this belief, it is a fact that many of these older houses have been renovated, expanded and improved over the years, in many cases more than once.

These properties are thus not the original property that they were a number of years ago, and have often appreciated in real value over time as a result.

Moreover, during a boom phase in the property market, as we are experiencing currently, one would expected the increased construction of new housing to lower the average age of the housing stock.

Against this background, with the price difference between new and existing houses being one of the indicators in determining whether property prices are overvalued, the view is still that the South African residential property market is, maybe with exception of some segments and areas, generally regarded as being in a boom phase rather than experiencing bubble conditions.

However, related trends, developments and factors regarding the different regions in the country and segments of the property market should be monitored and analysed on a continuous basis in order to determine changes that may have an adverse effect on conditions and prospects.

Notes: House prices are based on the total purchase price of houses in the 80m²-400m² size category, valued at R1,6 million or less (including improvements), in respect of which loan applications were approved by Absa.

Prices are smoothed in an effort to exclude the distorting effect of seasonal factors and outliers in the data.

Quick Polls

QUESTION

As National Treasury mulls a two-bucket retirement system, mandatory contributions and preservation, regulation 28 is being amended to allow up to 40% of retirement fund assets to be invested in SA-based infrastructure… Which of the following retirement fund ‘tweaks’ would you consider most beneficial to your clients?

ANSWER

Give fund members emergency access to retirement savings
Let fund members invest 40% in infrastructure
Let fund members invest 40% offshore
Mandatory preservation when resigning from a fund
fanews magazine
FAnews August 2021 Get the latest issue of FAnews

This month's headlines

Why it’s an amazing time to be an adviser and broker...
Power of the pack… In the company of women
POPIA pandemic - Tick tock goes the POPIA clock!
The unimaginable imaginable risk
How global cities could benefit from green dividends
Are life insurance products too complex?
Subscribe now