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Are house prices still unrealistic?

According to First National Bank (FNB) house prices remain unrealistic despite the 18.9% real house price decline since the boom period peak in 2007.

John Loos, a household and property sector strategist at FNB Home Loans, believed the residential market remained unrealistically priced and continued to partly reflect the 2000 to 2007 economic boom period and was not fully reflecting a weak economy battling to average 2 percent annual growth since 2008.

He believed the downward 'correction' in real house price levels had been temporarily stalled by abnormally low interest rates since about 2010, which was a temporary Reserve Bank response to an abnormal global and local economic pressure situation and in turn provided 'abnormal' support for residential property demand.

'These abnormally low interest rates have supported gross domestic expenditure. But the wide current account deficit that we as a country run is reflective of a country living well beyond its means, domestic expenditure far exceeding national income. This is not sustainable in the long term.'

Loos expects the gradual longer-term downward real house price 'correction' to resume in coming years because the Reserve Bank has indicated its intention to slowly 'normalise' rates, which in turn was expected to help curb the country's 'dangerous excesses'.

But he stressed that market adjustments to longer-term home affordability challenges did not happen solely through a real house price decline.

He said they also took place in the form of changes in residential building characteristics, such as attempts by the residential development sector to keep property affordable through reducing the average stand size and average home size, a shift to more sectional title and fewer luxuries, such as domestic workers' quarters and swimming pools.

Loos said land scarcity was mounting, not because there was an overall dearth, but a mounting shortage of land in reasonable proximity to where economic activity took place and with appropriate levels of services and infrastructure, particularly transport infrastructure, required by owners.

He said this effective land scarcity around urban centres would result in a long-term increase in real property values when measured on a price per square metre or hectare basis as opposed to a measurement per residential unit.

Loos said this long-term rise would not be fully witnessed in the long-term real price growth of an average house price index because this measured the value of the average house that was transacted and over time the average house was changing in size and characteristics.

He believed a more long term rising trend would be evident if an average house price index could be constructed for the past few decades that could be adjusted for these changes to the characteristics of the 'average home' instead of using the average house price regardless of these changing characteristics.


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