What does crime do to the potential price of a house?
A few weeks ago I was mugged. Granted, we probably shouldn't have been walking to
our car two blocks away, but at the same time, there were many people around us,
and cars had ground to a standstill in bumper-to-bumper traffic. In hindsight, a
cold barrel to the temple is enough to make you cooperate, and also enough to
make you consider the spin-offs of crime to our economy. And it was on this note
that I began considering the impact of crime on house prices.
We all know the price of a house is largely determined by the number of people
that demand to purchase it. When making a choice, an individual is valuing not
only the intrinsic particularities of a property (in other words, the type of
construction, number of bedrooms, square metres, age of the building, etc.) but
also location aspects such as, neighbours, crime statistics, access to shopping
areas, schools, distance to work and the environment. Economic theory calls this
hedonic pricing. Simple English calls this being smart.
Most property listings in South Africa make mention of the fact that a house has
some form of security in order to address any concern about crime. Yes, other
factors that affect the price of a house do exist, but with crime being
notorious in South Africa, it may be useful taking this into consideration when
formulating the price of a house.
Figure 1: Number of burglaries at residential premises
Source: Institute for Security Studies, Macquarie Research, August 2007
One of the most prominent reasons for someone to choose a complex over a
free-standing house is that a complex gives the owner a greater sense of
security; a guard monitors the traffic flowing in and out of the complex, the
entire area is usually surrounded by electric fencing or an 8-foot wall, and the
close proximity of neighbours allows peace-of-mind that should something occur,
you won't be alone. Although the actual numbers are difficult to prove, most
estate agents would be able to confirm that a clear reason for the high number
of sectional title sales over the past few years has been a spin-off from the
search for greater security (see graph below).
Figure 2: Full title versus sectional title growth
Source: Statistics SA, Macquarie Research, August 2007
As for full-title houses, sales of security mechanisms have soared over the past
few years. From electric-fencing to alarm systems, from 24-hour patrol vehicles
to burglar bars, this market has grown and grown. There is no doubt that a
free-standing house with an 8-foot wall, two dogs, an electric fence and the
presence of a patrol vehicle every fifteen minutes is more of a deterrent to a
criminal than a house without these additional factors.
Okay, so let us do a quick comparison. After speaking with four estate agents I
managed to get to grips with some actual numbers. Take two 3-bedroom houses in
Bryanston; House A and House B. Both houses are roughly similar in size,
location and amenities (such as bathrooms, swimming pools, etc.). The contrast
is that House A has a 6-foot wall and no electric fencing; House B comes with a
10-foot wall and an additional 1-metre high electric fence. Add to this the
menacing sound of three rather large canines behind the 10-foot wall of House B
and there are no prizes for which house a criminal would choose!
The final price difference? Sizeable.
Although both houses were originally set at a similar price level
(approximately R1.6 million), the selling price of each differed quite
significantly. The estate agent informed me that House A has been on the market
for 2 months; and that many potential buyers would have easily been swayed if
the security levels had been higher. Furthermore, the buyer managed to negotiate
the price down considerably, basing his reason on having to spend extra on
increasing security. On the flip side, House B was sold in a short two weeks and
with no significant renegotiation on the price.
Unfortunately, crime levels differ hugely from one suburb to another and so, a
national average of how crime affects house prices is not available. But without
a doubt, the level of crime in your area will affect the price of your house. It
is best to keep an eye on your neighbours as a benchmark of what standard of
security is needed.