Property good for the long haul?

8 November 2004

South African house prices are going through the roof – so much so that a major bank has been forced to revise its definition of what a middle-class home costs.

The Absa House Price Index shows that nominal year-on-year growth of 33.7% was recorded in September 2004, the highest rate of growth in any month since November 1981.

Now it says R1.2-million is the official average price of a middle-class home. Homes only qualify as luxury homes if they are worth between R2.2-million and R8-million (up from the previous definition of between R1.6-million and R5.5-million).

According to Absa, “affordable” houses are now those that cost less than R193 000.

Property price bubble? While rocketing property prices in South Africa have left many sellers and long-term investors happy over the last year or two, experts are divided over whether or not the country’s experiencing a property price bubble – one that’s going to burst and hurt first-time home owners or near-sighted investors.

On the one hand, some say there’s still room to move in the country’s property price boom, pointing out that South Africans still pay far less than Europeans, Americans and Australians for their homes.

One the other, many are saying that prices are currently unsustainable, and prohibitive to first-time home owners. A recent weekend newspaper report said that many banks are turning down loan applications because, in part, of the exorbitant prices being asked for property.

Investing in commercial property
Foreign investors are increasingly buying South African commercial property as a medium- to long-term investment.

While an average increase of 22% in South African house prices was recorded in 2003, already house prices have risen by 20% in 2004, and by the end of the year are expected to have risen by 36%.

Peter Smith, regional executive for Nedbank Property & Asset, feels growth is far from over.

“The fact that ordinary investors these days prefer property to equities, and that interest rates in the next year are very unlikely to rise by more than 1.5%, it seems likely the residential property bull run will continue for at least 18 months”, Smith told Business Report recently. “This pattern is also likely to be reflected in increased values in both commercial and industrial property.”

“Any investment in property should be viewed as medium to long term”, Smith argued. “It remains almost certain that capital growth on properties will remain well above 15%.”

Analysts say experiences in Europe, Ireland and Australia show that a sharp rise in property prices does not necessarily lead to a subsequent collapse.

Barrak Geffen, executive director of Sothebys International Realty, told Finance24 that South Africa has the right fundamentals – including low interest rates and a rising GDP – to maintain the rising prices.

But Michael Jawitz, CEO of Jawitz Property Services, was quoted recently as saying that prices “are unsustainable at the present [growth] rates”. He insists that the industry cannot continue to grow at 20% per annum in the future.

Analysts say the steady drop in interest rates over the past few years is part of the reason for soaring prices. But the Reserve Bank cautions that household debt as a percentage of disposable income increased in the first quarter of 2004 to 54%, rising from 52.5% in the last quarter of 2003.

Call to regulate estate agents
Wendy Machanick, managing director of a real estate company that goes by the same name, says the industry needs more regulation to protect buyers from unscrupulous and ill-informed real estate agents – agents who are benefiting handsomely from the current boom.

“There is a need for government and the industry to get together to form a fully representative organisation that will set standards”, Machanick said.

The price spike has reportedly seen an increase of some 18 000 newly registered real estate agencies over the last few years, with some 45 000 registered agencies operating in 2004.

‘Township’ property: untapped potential
Meanwhile, a new study has shown that homes in former black townships in South Africa are worth R68.3-billion – but that homeowners are failing to tap into the full economic potential of their assets.

According to The Township Residential Property Market research, potential income-generating activities include renting properties or using premises for business purposes. The study described houses in townships as “dead assets”, contributing towards housing needs but not economic upliftment.

The research indicated that only 12% of houses in townships, with a combined value of more than R8-billion, were bought or sold over the past five years. reporter