Reading the Lags of Bricks and Mortar

Private Property South Africa
Gina Schoeman

I have been asked on numerous occasions: "What should I look for in order to

gauge future values of houses?" and "how do you find out where house prices are

going?" etc. etc. As tempted as I am at times to bring out my crystal ball,

there are certain indicators that give us a clue as to what to expect from house

prices in the future. When attempting to forecast the residential property

market, a rather useful indicator to use is that of building statistics. This

indicator is essentially the number of building plans that have been passed (in

other words, approved) and the number of buildings that have been completed (in

other words, ready to be sold).

One must keep in mind that the stock of residential property in South Africa is

immensely large. At the same time, because land is a scarce resource, supply and

demand creates volatile momentum in the market. For example, although there is a

large amount of land available (supply) on the outskirts of Johannesburg, the

residential property here is not near as much in demand as the property located

within the more central region, of say, Bryanston. The demand for housing grows

strongly in line with both population growth, and personal-empowerment growth.

The gist of the indicator is that, if there is a limited supply of housing

coming onto the market, one can expect that prices will climb (and vice versa).

The causality of the two statistics run as such: building plans passed provide

an indication of how much infrastructure is to be built in the residential

property market, while buildings completed will allow one to gauge the number of

houses that are to be sold.

Source: Statistics SA

The graph above shows the smoothed year-on-year growth of both building plans

passed and buildings completed. What is interesting to note is the lag between

the passed date and the completed date. Take for example the spike in plans

passed in December 2002: catching onto the rise in the house price boom, many

developers appear to have taken the bait, and a large number of plans were

passed for future residential buildings. The next large spike, seen roughly

around July 2004 may indeed indicate that the bulk of plans passed were ready to

be sold approximately 1½ years later (according to the developers I have spoken

to, this is a sufficient average for how long it generally takes). And in turn,

once the largest bulk of housing was completed in mid-2004, it was about six

months later that the peak of the housing boom became apparent and thereafter,

house price growth began to decline steadily.

Analysis of the graph below shows that since mid-2006, the trend in year-on-year

growth for building plans passed is down. And this is supported by factors such

as higher interest rates, declines in house price growth and over-indebtedness

of the South African consumer.

Source: Statistics SA

Plans passed thus gives insight as to what to expect in the future. The

declining trend in plans passed, especially in smaller housing (such as houses

less than 80 square metres in size, together with flats and townhouses)

indicates that we can expect the housing stock of this type to shrink roughly

1-1 ½ years from now.

And so, one must keep in mind that 'bricks and mortar' play an important role in

the future of residential housing stock. The more housing planned for the market

should usually signify that a larger supply will soon be available, and if there

is not a sufficient level of demand to meet this, prices will indeed slow down;

the opposite applies with a decline in plans. This brings a comforting aspect to

the table: if there is a limited supply of smaller houses in the future, and if

prices increase as economic theory states they should, the market may well open

up for the buy-to-let market, or the first-time homebuyer, once again.

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