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5 to 6 percent house price growth – fact or fiction?

The man in the street is not getting the full picture. He is being told by the banks, mortgage originators and estate agents that average home prices increased by between 5 percent and 6 percent a year in 2015, when in fact, they only increased by 0.94 percent.

This is according to Neville Berkowitz, whose title is property economist and adviser to low-commission estate agency, HomeBid.

Berkowitz says: “Even the South African Reserve Bank is using this incorrect information in its assessment of home price inflation which it estimates at the inflation rate of 5.2 percent for 2015, according to the December 2015 Reserve Bank Quarterly Bulletin.

“The discrepancy lies in the limited sample of sales and transfers used by these market commentators,” says Berkowitz. “We, however, analyse every single home sold and transferred in all the deeds offices around the country: 289 613 in 2015 and 290 257 in 2014.

“In 2014 the average price of a home transacted at the deeds offices around the country was R1 222 639 and in 2015 it was R1 234 120 – an increase of only 0.94 percent. This is based on information supplied to us by the South African Property Transfer Guide (SAPTG), which we use to analyse market trends.”

He says that SA banks each only have a maximum 9 percent market share of the total sales and transfers due to 65.5 percent of homes being bond-free, according to research by Absa and Lightstone.

The banks’ samples on which they base their home price increases may not, therefore, be fully representative of the entire residential market.

“High-commission estate agencies each have less than 5 percent market share of all the homes sold and transferred in 2015 on which to calculate their home price increases, so they obviously also lack the information based on all the 289 613 homes sold and transferred last year,” says Berkowitz.

“To illustrate, the largest number of homes transacted in 2015 was in the lowest-price category of less than R250 000, where some 85 155 homes or 29.4 percent of all homes were transacted. These homes, on average, dropped 6.7 percent in price in nominal terms, and were 11.9 percent down in real terms (after inflation), in 2015 when compared to 2014. This was mainly due to the 0.5 percent increase in interest rates last year. The prospects for this price category in 2016 are even bleaker as interest rates are expected to rise during the year by at least 1.5 percent.

“At the top end of the price category range are the R10 million-plus homes which saw the highest average price increase of only 2 percent a year. This is based on the average price of the 2 642 homes sold and transferred nationwide in this price category in 2015 compared to 2014.

“What concerns me most about these 5 percent to 6 percent a year average home price increases used by market commentators, who may be using limited samples of homes sold and transferred, is that the average homeowner believes he currently has an inflation-proof investment rising at above the inflation rate,” says Berkowitz.

“In 2015, however, the 0.94 percent average home price increase was, in fact, a real decline of 4.2 percent after adjusting for inflation, and well below the inflation rate of 5.2 percent for the year.”

Berkowitz believes the outlook for 2016 is worse, with a possible drop in nominal average home prices below zero and an inflation rate probably higher than the 3 percent to 6 percent range aimed at by the Reserve Bank. CPI is expected to be in the 7-10 percent range for 2016.

“If people knew that in 2015 it would have been more profitable to rent a home and leave their money in the bank earning 6 percent a year than investing in a home at 1 percent growth, perhaps there would be fewer homes repossessed which cause financial hardships for many,” says Berkowitz.

“We need more transparency from commentators on home prices, especially high-commission estate agents and mortgage providers, as to where their information is derived from and how they calculate their estimates of average home price increases of 5-6 percent a year for 2015 as well as their projections for 2016. The man in the street needs accurate, transparent information about his most valuable asset – his home.

“First-time buyers are usually uninformed about homeownership and accept what they read. They are the most susceptible to losing their hard-earned savings in a property market where average home prices in nominal terms are likely to be going sideways, at best, for the 12-18 months,” says Berkowitz.

SA Property News asked some of the high-commission estate agents and mortgage providers to comment on Berkowitz’s arguments.

To create some context around the transparency of the data that Absa’s property analyst Jacques du Toit (Absa Home Loans) uses in the Absa Housing Review and House Price Index - Absa says that the Absa House Price Indices, available back to 1966, are based on the total purchase price of homes in the 80m²-400m² size category, priced at R4.4 million or less in 2016 (including improvements), in respect of which mortgage loan applications were received and approved by Absa.

Prices are seasonally adjusted and smoothed in an attempt to exclude the distorting effect of seasonal factors and outliers in the data. As a result, the most recent index values and price data may differ from previously published figures.

The information in both the Absa Housing Review and House Price Index is derived from sources which are regarded as accurate and reliable, is of a general nature only, does not constitute advice and may not apply to all circumstances.

“The source and calculation of our house price data and market segments we analyse is based on our own definitions and this is clearly communicated in the review and index. The Index explicitly states that it is a view based on the mortgage loan applications received and approved by Absa,” says du Toit.

Dr Andrew Golding, chief executive of the Pam Golding Property group, says: “There are obviously many ways possible to review the performance of the residential property market statistically. The Pam Golding Residential Property Index is based on the globally-respected repeat sales methodology incorporating residential property transactions registered at the Deeds Office as well as other data sources across the country’s residential property market, including PGP’s own sales data.

“The best-known repeat sales indices are the Standard and Poor’s / Case-Shiller Home Price Indices in the US. Both Residex and the UK Land Registry compute repeat sales indices for Australian cities and the UK respectively (OECD).

“An advantage of repeat-sales methods is that they calculate changes in prices based on sales of the same property, thereby avoiding the problem of trying to account for price differences in homes with varying characteristics.

“While all indices have their strengths and weaknesses, the fact that the repeat-sales methodology is the index of choice for so many leading international house price indices supports our belief that this method provides a fair and accurate guide for property professionals and individuals requiring insight into the local housing market.”

Seeff chairman, Samuel Seeff, says that where industry statistics on house prices, growth and other figures are needed, Seeff draws on various highly credible sources that are respected by the industry and have been around for many years.

These include John Loos, property economist at FNB, Absa’s du Toit, mortgage originator ooba’s oobarometer – which includes a broad spectrum of banks and agencies and so provides a wider scope than perhaps FNB and Absa – as well as other data sources such as Lightstone and Propstats, which is limited to participating agency sales only.

“Concerning Berkowitz’s comments on house price average growth, an average house price is just that, an average. It gives a guideline and is by no means definitive, as prices vary according to the street, suburb, area, size of property, town, city or region.

“Also, many properties are transacted through the deeds office annually, many of which are not ordinary market transactions so it is important to understand whether these non-market or zero-value transactions have been excluded from Berkowitz’s calculations as these certainly would influence the average prices and growth percentages.”

Seeff says it is important also to exclude the affordable housing sector – which includes a substantial portion of former township areas – from any national average calculation. This particular industry is very different to the rest of the market, often volatile when it comes to prices and price growth. This sector also tends to use minimal estate agency services and is usually dealt with as a separate category.

“From what we can see, almost 50 percent of the sales analysed by Berkowitz fall in the affordable, sub-R499 000 sectors and we would assume it's also taken into account in arriving at the national average growth percentage quoted.

“Similarly, the luxury R20m plus sector is also usually excluded as prices tend to vary considerably and anomalous transactions can skew the averages. For instance, if there are two sales in Clifton for the year, one at R20m and one at R100m, the average sales price would be R60m, but that is not correct as it is skewed by the R100m sale which was an anomaly. Agencies that operate in the area and understand the market would, therefore, know that the average price for the suburb is around R20m, although properties and prices, of course, vary quite drastically.”

On the notion that consumers are perhaps better advised to rent, rather than buy, Seeff is on record to the effect that home ownership, especially for the bulk of the buying public which comprises about 80 percent of the market, cannot just be viewed from a pure investment angle.

“Most people buy a roof over their heads, security for their future, a place to raise a family and build a life. That the home comes with inherent capital value growth is an added bonus,” says Seeff.

“The notion that 80 percent of the SA buying public must rent rather than invest in a home is also too simplistic. By far the largest portion of home owners and buyers are lower and middle-class earners who have very tight household budgets. They usually don’t have too many surplus funds to invest and it is highly unlikely that they will have anything close to the equivalent of the repayment on a house after they have had to pay rent for the month.

“Continuing to pay rent is not the same as investing in bricks and mortar. If say you pay rent for five years, you end up with nothing. If you repay a mortgage loan, after the first five years you can look forward to some capital growth and at the end of the term of your loan, say 20 years, you could have a roof over your head, fully paid for that is worth a sizeable sum, not to mention that you can leave the asset to your dependants.

“We would most certainly dismiss Berkowitz’s analysis, advice and assumptions as too simplistic and out of step with the industry and the market,” says Seeff.

Lew Geffen, chairman of Lew Geffen Sotheby’s International Realty, says it would be extremely remiss and short-sighted of bank economists and bond originators only to take into account their market share when analysing the property economy of a country because their future profitability depends on accurate information across the board.

“SAPTG data is available to and used by everybody, as is Lightstone research if you subscribe to the service. This data is not the exclusive domain of HomeBid, but the company does appear to be manipulating the statistics in a mischievous manner to suit its own agenda,” says Geffen.

“Our market is mainly in the R1m-plus bracket and across the board in that sector there has been a compound gross growth rate of about 8 percent a year recently. For our purposes, it is quite correct that we do not look at the sub-economic housing sector because it is not relevant to our market. The growth trajectory in the mid- to higher-priced residential property sector has been particularly strong since the market recovery in 2012 after the global recession, and anyone who says that making a capital investment in property is wrong in the current economic climate, is greatly misleading consumers. Property is one of the safest investments you can make given the country’s economic situation, which show no sign of improving any time soon.

“Renting property is pouring money down the drain with no return on investment and no capital growth. It simply makes no sense to do that if you are in a position to buy,” says Geffen.

Francois Venter, director at Jawitz Properties, says it’s important to note that the data presented in Berkowitz’s article encompasses the whole of SA, including all metropolitan, coastal, leisure and rural areas. There are also very few homes in the central urban centres that are priced under R250 000 – the price category which makes up the lion’s share of Berkowitz’s sample.

“In the metropolitan areas across SA, for the period reported, price growth has certainly been above inflation and real price growth has been achieved. The general lack of supply and continued pent-up demand from buyers, certainly in the metros, has pushed property prices up above inflation; therefore properties prices are achieving real growth.

“The outlook for 2016 is a rising inflation and interest rate cycle, the impact of which will potentially influence buyers’ decision-making, affordability and current homeowners’ ability to service their debt and mortgages. We expect that property prices will still rise above inflation in the metropolitan areas, but at a slightly slower pace than in 2014/2015.  We also expect the power to slowly start to shift from a predominantly sellers’ market over the last few years to a buyers’ market over the next few years,” says Venter. 


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