House prices even worse
Nov 06 2008 07:41
Elma Kloppers
Johannesburg - Although the First National Bank (FNB) house price index for October shows nominal house price growth of 1.1% on an annual basis, the housing market is in reality probably in national decline, says John Loos, property analyst at the bank's home loan division.
He considers it unlikely that the index reflects the full extent of the market weakness as there are practical challenges when it comes to calculating a house price index.
"The basic issue is that an index is calculated on the basis of property transactions within a given period, and not on the basis of all existing stock."
In a perfect world every home in the country would be appraised each month and the average value updated. This is, however, impractical, and the calculation is therefore modelled on the small number of transactions in each period.
He reckons it would not be a problem if the ratio of units changing hands over a period, expressed as a percentage of the total stock, were the same for all areas and all market segments.
This is however not the case and a house price index is usually influenced more by transactions on the costlier side of the market where more transactions take place.
Another practical problem is the fact that, as the property cycle evolves, volumes rise and fall at different tempos in different segments.
A good example is the full-title two-bedroom (or smaller) segment, which is under tremendous pressure and where prices dropped 11.7% on an annual basis in the third quarter this year. The three-bedroom segment is more stable, with annualised price growth of 9.4% in the same period.
Loos says this makes it difficult to calculate an index that reflects the full range of the market.
"In reality conditions should be worse than the index suggests."
- Sake24
