Property lags cash

Cape Town - It's optimistic to expect residential property to deliver a yield that is substantially above inflation in the long term.

This is the conclusion reached by Nedgroup Investments from an analysis of house prices in the past four decades, as well as from other studies.

Matthew de Wet, head of investments at Nedgroup Investments, analysed Absa's house price index to determine whether over a long period property offered a higher yield than inflation.

According to him, this house price index shows that the value of South African residential property has risen by 11.2% a year since 1966.

"Because house prices are a hundred times what they were 40 years ago, it is understandable that homeowners often proudly refer to the steady return that their property has produced," he explained.

He reckons that over the same period cash has however produced a higher return - 11.7% a year. "In other words, house prices have not kept pace with cash in the bank."

This becomes even more interesting if the effect of inflation is discounted. Real house prices (where inflation is not taken into account) have risen an average 1.6% a year over the past four decades.

In the shorter term, there has of course naturally been considerable volatility. From 2001 to 2007 real house prices jumped by almost 250%. For the more than 30 years before this house prices had not risen at all in real terms.

But De Wet also refers to Markus Demary and Michael Voigtlander who wrote the report "The inflation hedging properties of real estate", which concluded that residential property was indeed a very effective hedge against inflation.

He also refers to a study that investigated house prices between 1628 and 1973 in Amsterdam's Herengracht district. Houses in this environment are highly suited to an investigation dealing with long-term house prices because the dwellings have remained largely unchanged.

The suburb has also retained its status as Amsterdam's most desirable. This is important, because it means it's an area that has retained its value compared with property in other areas. This study shows that house prices have risen by an average of only 0.5% a year on a real basis.

The results have also been reasonably stable over the centuries. The lowest real decline was 0.2% per year in the 18th and 20th centuries, and the biggest appreciation was 1.3% per year in the 17th century.

In the shorter term real prices fluctuate much more - up to more than 50% over a ten-year period. "Homeowners mustn't expect capital growth to far outperform the inflation rate over a longer period or do better than money in the bank," he urges.

- Sake24