The Property Market: not flying but neither is it flat

In 2012 property economist Erwin Roode made a few waves with his statement that property prices were overvalued by at least 25 percent.
At the time a number of those associated with the industry objected to his appraisal with John Loos, FNB home loans strategist, believing that Rode was not using the most accurate period from which to make his deductions. Loos reasoned that Rode based his assessment over a 44 year period from 1967 to 2011 but that it would be more accurate to valuate properties from 1995 onwards due to the political shifts that preceded it.   
“The issue I had, and still have, with Rode’s statement then is that property values will always increase over time. There is a scarcity of land and, as Mark Twain said; ‘they’re not making any more’. If one takes a long term perspective, property is an appreciating asset”, believes Jan le Roux, CEO of Leapfrog Property Group.
Recent data supports this view as the May 2013 ABSA House Price Indices revealed that nominal house prices grew by 11.1% in April. Real price growth, after adjusting for the effect of consumer price inflation came to 5.2% in March. According to the report the average nominal value of homes in each of the three middle-segment categories was as follows in April 2013:
·         Small homes (80m²-140m²): R736 800
·         Medium-sized homes (141m²-220 m²): R1 066 500
·         Large homes (221m²-400m²): R1 615 400
“Clearly Erwin Roode’s statement has proven to be incorrect for the moment and I believe, caused a number of home owners to panic unnecessarily”, says le Roux. It is no secret that the residential property market is not soaring like it did during the 2006 – 2007 heydays when, according to Lightstone, the nationwide average for a sectional title property increased from R546 960 to R642 764. Nor is it news that new home owners have been struggling to obtain financing due to banks strict lending criteria. Increased petrol and electricity prices as well as mounting inflation have also put pressure on people’s incomes.
That being said, Lightstone figures indicate that property prices have climbed steadily with each consecutive year since 2009; the nationwide average for a sectional title property now stands at R782 547. The trajectory for freehold properties was slightly more up and down with two drops between 2007 to 2009 (decreasing to R563 488), but has not risen to R763 005 in 2013. 
The FNB Property Barometer for May 2013 indicates that residential property showed year-on-year growth of 5.8% with the average value of homes transacted in the FNB House Price Index being R855, 773. A lot of figures, but they all essentially indicate the same thing – residential property prices in South Africa have been on the increase, albeit slowly, for some time. John Loos, Household and Property Sector Strategist at FNB, goes on to mention in the report that the index is up by 49.8% in real terms and 151.9% in nominal terms since May 2003. He believes this to indicate that “the price effects of last decade’s residential demand boom have far from worn of, despite a significant downward real correction since late-2007”. 
“The fact of the matter is that property prices will increase over time, especially in high density areas where the demand for housing is always high. Add to that the fact that building homes and apartments is becoming increasingly expensive, and it becomes clear that current properties are by no means overvalued”, believes le Roux. 
Le Roux does agree with Loos that prices might still take a knock this year due to the current financial climate but, is adamant that the situation will correct itself once the economy improves.

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