Cash beats properties

Johannesburg - According to Absa's latest quarterly housing review released on Tuesday, average house prices fell 3.9% in the second quarter of 2009 year-on-year.

That brings the price of a middle segment house to R929 342, a level last recorded in May 2007. Therefore, any capital growth property owners would have recorded since mid-2007 has now effectively been wiped out.

Of course, the average home-owner will still be in the money if current house price levels are compared to those seen before the most recent housing boom took off. Absa figures showed the price of the average South African house has gone up a hefty 269% in the nine-and-a-half years from January 2000 to June 2009.

However, the picture looks decidedly less rosy if the performance of residential bricks and mortar is measured over a much longer period. Head of investments at Nedgroup Investments Matthew de Wet said over the last few decades residential property has not necessarily delivered great capital growth.

In fact, over a 43-year period house prices have failed to keep up with cash in the bank. According to De Wet's research, the value of residential property has increased at a rate of 11.2%/year since 1966, compared to a slightly higher return of 11.7%/year on cash. De Wet's figures are based on Absa's house price data.

The comparison becomes more interesting once the effects of inflation are stripped out. Real (after inflation) house price growth has only averaged 1.6%/year over the past 43 years, which De Wet said is significantly lower than many might expect. More surprising perhaps is that over the 35-year period from 1966 to 2000, house prices did not grow at all in real terms.

De Wet said the 1.6%/year after-inflation growth figure may even be an overstatement as the average house has become bigger and its quality has improved. "You may well be getting more house for your money now than you did back in 1966."

De Wet conceded that an investment in residential property could be an effective hedge against both expected and unexpected inflation, but warned investors not to expect capital growth on bricks and mortar to outstrip inflation or money in the bank by any great margin.

Said De wet: "Residential property may well represent the cornerstone of most families' wealth, but it seems optimistic to expect house prices to increase at rates significantly above inflation over the long term."

- Fin24.com