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The 'myth' about SA house price growth

Feb 14 2016 19:00

Cape Town - The man in the street is not getting the full picture about house price growth, according to Neville Berkowitz, property economist and adviser to estate agency, HomeBid.  

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.

“What concerns me most about these 5% to 6% per 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,” said Berkowitz.

“In 2015, however, the 0.94% average home price increase was, in fact, a real decline of 4.2% after adjusting for inflation, and well below the inflation rate of 5.2% p.a. for the year.
The outlook for 2016 is worse, with a possible drop in nominal average home prices below zero and an inflation rate (CPI) probably higher than the 3% to 6% per year range aimed at by the Sarb. CPI is expected to be in the range 7% to 10% per year for 2016."

He said 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% per year than investing in a home at 1% per year growth, perhaps there would be fewer homes repossessed which causes financial hardships for many.

In his view, even the SA Reserve Bank (Sarb) is using incorrect information in its assessment of home price inflation, which it estimates at the inflation rate of 5.2% per year for 2015, according to the December 2015 Sarb Quarterly Bulletin.

“The discrepancy lies in the limited sample of sales and transfers used by these market commentators,” said Berkowitz. “We, however, analyse every single home sold and transferred in all the deeds offices around the country, namely 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 R1.2m and in 2015 it was R1.23.

South Africa’s banks each only have a maximum 9% market share of the total sales and transfers due to 65.5% 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, he said.

“High-commission estate agencies each have less than 5% 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,” said Berkowitz.

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% of all homes were transacted. These homes, on average, dropped 6.7% in price in nominal terms, and 11.9% down in real terms (after inflation), in 2015 when compared to 2014.

This was mainly due to the 0.5% per year increase in interest rates last year. The prospects for this price category in 2016 are even bleaker, in his view, as interest rates are expected to rise during the year by at least 1.5% per year.

At the top end of the price category range are the R10m-plus homes, which saw the highest average price increase of only 2% per year. This is based on the average price of the 2 642 homes sold and transferred nationwide in this price category in 2015 when compared to 2014.

property  |  sa economy  |  house price growth

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