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More 'homework' needed on house price 'myth' - experts

Feb 15 2016 21:30
Carin Smith

Cape Town - A number of role players in the property industry have reacted to the view by Neville Berkowitz, property economist and adviser to estate agency HomeBid, that average home prices in South Africa only increased by 0.94% per annum.

According to Berkowitz, the man in the street is not getting the full picture about house price growth,

"The man in the street is being told by the banks, mortgage originators and estate agents that average home prices increased by between 5% and 6% per annum in 2015, when in actual fact, they only increased by 0.94% per annum," he said.

John Loos, household and property sector strategist at FNB Home Loans, told Fin24 he does not agree with the “lack of transparency allegations”.

"We do provide notes at the back of our reports on the FNB Home Price Index (HPI), and I even write certain articles about general shortcomings of HPIs myself," said Loos.

"Certain FNB’s HPIs do use deeds data (the bigger sample size), and not our own FNB data. While our high frequency monthly HPI is from our own FNB data - for reasons such as property detail info and being more up to date, and this averaged 6% for 2015 - our FNB Major Metro HPI (and the Area Value band segmentation) is from Deeds data."

It averaged 6.4% price growth for last year, and Loos said he mentions this “deeds data use” fact in the text of the documents whenever publishing it.

"If I use the FNB Major Metro Deeds dataset, but don’t apply areas of sub-segment fixed weightings then I also get to a far lower price growth rate (1.9%), similar to Mr Berkowitz, for 2015 because the reality is that the transaction volumes grew stronger at the low end in 2015, while declining on the higher end," explained Loos.

"Yes, transaction activity shifts over time across value bands are the number one challenge of any HPI compiler. Right now, HomeBid’s simple unweighted average should show such low inflation as a result."

In the view of Loos, it probably isn’t about FNB's own sample sizes being unrepresentative, it is simply about a stronger lower end.

"FNB tries to restrict this impact of activity shifts by applying fixed weightings to sub-segments and areas. HomeBid doesn’t, and I would suggest that’s probably largely the reason why their result differs from ours at least - though nobody can say for sure that someone else’s inflation rate is wrong," added Loos.

He pointed out that, besides FNB, in the case of many of its indices (Major Metro, Area Value bands, Holiday Towns, for example), Lightstone also uses deeds data.

"So HomeBid’s argument that everyone else has small data samples is not entirely true," said Loos.

"My feeling is, therefore, that they need to do a bit more homework on how our various indices are compiled (and why) before pronouncing on them. They have their flaws for sure, but the flaws aren’t necessarily anywhere close to the ones that HomeBid is 'identifying'."

Too simplistic

Seeff chair Samuel Seeff also dismisses Berkowitz’s analysis, advice and assumptions as "too simplistic and out of step with the industry and market".
 
He said where industry statistic on house prices and growth are needed, Seeff draws on various "highly credible sources that are respected by the industry and have been around for many years". These include Loos from FNB, Jacques du Toit, senior economist at Absa, the oobarometer and other data sources such as Lightstone and Propstats.

"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, region, city, town," said Seeff.

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

It is also not clear for Seeff whether commercial transactions, including for example sectional title units in mixed-use developments, have been excluded from the analysis.

"It is important also to exclude the affordable housing sector - which includes a substantial portion of the former ‘township’ areas - from any national average calculation. This particular sector is very different to the rest of the market, often volatile in terms of prices and price growth," cautioned Seeff.

Similarly, the super luxury R20m plus sector is also usually excluded as prices tend to vary considerably and anomalous transactions can skew the averages.

As for Berkowitz's view that SA consumers should rather rent (and invest their money) than buy domestic property at the moment, Seeff said home ownership, especially for the bulk of the South African buying public which comprises about 80% of the market, cannot just be viewed from a purely investment angle. It is too simplistic.

"These people do not buy investments and are not concerned with returns on investment. They buy a roof over their head, 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," said Seeff.

"By far the largest portion of home owners and buyers are lower and middle class earners, who have very tight household budgets. They usually do not have too much 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."

He added that 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 pay a mortgage loan, after the generally regarded golden period of the first five years, you can look forward to some capital growth and at the end of the term of your loan, say after 20 years, you may be in your late forties and have a roof over your head, fully paid for that is worth a sizable sum, not to mention that you can leave the asset to your dependants as an inheritance," said Seeff.

"Property ownership is the cornerstone of a strong foundation and economy. I am on record too as stating that there is no substitute for home ownership. If you are able to do so financially, then it is almost always better to buy than to rent."

Many ways to review

Dr Andrew Golding, chief executive of the Pam Golding Property group said there are obviously many ways possible to statistically review the performance of the residential property  market.

The Pam Golding Residential Property Index is based on what he calls 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 Pam Golding Properties’ extensive sales data.

“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," said Golding.

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

Not buying it

Property consultant Erwin Rode of Rode & Associates also says he does not "buy" the Berkowitz assertion that house-price inflation is below 1%.

"Absa and FNB use a method of tracking house prices that is similar to the approach used by Neville Berkowitz – namely comparing average sale prices over time. The disadvantage of this method is that where a structural or cyclical change takes place, the resulting average growth rate could be misleading," explained Rode.

An example of a cyclical shift in the marketplace is where proportionally more inexpensive houses are being sold than previously, for instance because developers are now concentrating on inexpensive "affordable" or "gap" houses, and, therefore, more houses in this price class are transferred, thereby pulling down the average price.

"However, the banks (partially) overcome this problem by reporting their calculated inflation in different price classes," said Rode.

Both banks calculate the house-price inflation as between 5% and 6% at present.

"As a further check, one can consider the house price index of Lightstone, which uses the repeat-sales method. This method entails comparing the price of a recently-sold house with the price it was previously sold for. This means, one is comparing like with like, unless the house was seriously renovated or added on to between the two sales dates. The Lightstone index also arrives at an inflation rate of about 5% to 6% at present," said Rode.

"This raises the question of how come Mr Berkowitz arrives at an inflation rate of less than 1% over the past year. The answer probably lies in his own admission, namely that in 2015 the largest number of houses transferred (29.4%) were in the category below R250 000. This would skew his calculated growth rate if the proportion of low-cost houses transferred were lower in 2014."

House price index

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 R4.4m or less in 2016 (including improvements), in “respect of which mortgage loan applications were received and approved by Absa", according to Absa’s Property Analyst Jacques du Toit.  

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 be applicable 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 attached. The Index clearly states that it is a view based on the “mortgage loan applications received and approved by Absa".

 
 
 
 

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