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.