South Africa’s 25% ‘overvalued’ property prices

A property economist suggests that South African house prices are at their lowest ever, adding that these prices still had some way to fall.

A top property economist stated in a report released yesterday that South African house prices may be overvalued by as much as 25%, and that it could take “many years” for prices to align themselves with actual values.

Going against the general consensus of estate agents, whom claims that South Africa is currently a buyer’s market and that property has never been cheaper.

The latest issue of the Rode Report on the South African property market sees CEO of Rode & Associates, Erwin Rode, saying that real house prices - excluding inflation - were still 25% higher than suggested by their trend line of the past 44 years.

Rode further added that using Absa’s house price index, which accounts for a third of mortgage bond finance, and the Bureau for Economic Research’s building cost index showed that house prices were indeed inflated.

"Considering that asset prices are mean-reverting, the implication is that a resumption in the down trend in real house prices is inevitable; it is only a question of time and speed," Rode said.

"A decline in real house prices does not necessarily mean nominal prices will decline. A more likely outcome is that nominal prices might grow at, say, 2% per annum for a few years while inflation is at, say, 6%."

As many know, last year was a tough year for real estate, and after a three year severe downturn, the market is still struggling to regain its footing.

Those wanting to enter the residential property market were faced with a difficult choice; to rent or buy? The economy it seems is still very uncertain and the general opinion is that the economy will have have this outlook for at least another year. Thus, first time buyers would be better off renting than buying in the next five years as overvalued houses would not have capital growth, according to Rode.

"It will take many years for prices of residential properties to come in line with their actual value, and South Africans are better off investing the difference between their rental instalments and what they would have paid into a bond elsewhere every month," he said.

CE of Jawitz Properties, Herschel Jawitz said while Rode was correct in predicting that property prices will decline in real terms it was difficult to concur prices needed to decline in real terms by 25%. He added that the latest Absa research showed residential prices had already declined by 14% in real terms.

"This would predict the total decline going forward at about 40%. I simply don’t see that happening, especially in the metro areas like Johannesburg, Cape Town and Durban," Jawitz said.

These areas are in demand with those seeking well-priced properties he said.

"This is very different to the coastal leisure areas where demand is soft at all price levels and real prices will continue to decline for some time. Even on the buy-to-let side, the picture is not all doom and gloom as stated by Mr Rode".

Lanice Steward, MD of Anne Porter Knight Frank, agreed that national statistics were seldom relevant to Cape Town.

Mr Rode said previous growth in house prices could be attributed partly to "irrational exuberance". Over the past 10-20 years buyers had paid prices above replacement value taking ageing into account, he said.

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