Is the stability of property prices a veneer?

Private Property South Africa
Justin Clarke

As safe as houses is a term we were brought up with, and one that I have always believed in, but is the relative stability in the property market just a thin veneer hiding a much more sinister quagmire ?

This year has brought about a series of shocks that have rocked the residential property market, and the industry. The first tremor was the collapse of Wendy Mechanic Properties, an icon and respected industry personality and member of the Estate Agents Affairs Board, who allegedly cleaned out her trust account to the tune of R25 million to keep her doors open, while one of the BIG brands have been in equal amounts of trouble accused of taking funds from their fractional ownership scheme companies. The EAAB has come out threatening to do an audit of all registered estate agents trust accounts, causing much discomfort for those who survived the crash of 2008 by rolling trust funds, but they are not the only parties shaken by the aftermath of the market crash. Developers are still falling taking many in their path, the largest of which is the beleaguered JSE listed Pinnacle Point Group, which looks like it will face liquidation, and even the shareholders of BondChoice have decided to call it a day, which will see the end of the number 2 mortgage origination company in South Africa.

Even the ABSA house price review, while showing some annual growth in house prices, around 3%, have inflation(CPI) turning up from 4% already with risks of interest rates turning towards the end of the year.

Is this an environment where property can be considered a serious investment proposition?

I believe it still is. In fact this is when it makes most sense.

So here are a few fundamentals that makes me positive about property:

I recently looked at developing a site I have owned with a partner for a few years and found that the new cost per residential unit was substantially more expensive than recently built similar properties for sale in the area. And its getting even more expensive to build, according to Industrinsight’s Residential Building Cost Index, which shows year-on-year inflation of 10.1% per square metre in the 4th quarter of 2010. Buying a new build now at a discount is probably cheaper than if you were to build it yourself, now. In fact by the 4th quarter of 2010 it was estimated to be around 25% more expensive to build new, according to FNB’s valuers.

A consequence of this is the reduced number of plans that are submitted. According to StatsSa all buildings completed in 2010 was 52% off the peak level of completions recorded in 2007. If supply decreases and demand remains constant, prices of second hand property will rise.

No decent rental property will stand empty and chances are existing rentals will grow faster than inflation as little new supply comes to market. There is already evidence of firming rentals in the residential sector.

Finally how much influence are the tight credit conditions on the market? We know that out of every 5 home loan applications sent through to the banks, only 1 is approved. We also know that there still is huge demand. Private Property had a record of over 1 million unique users looking for properties on their websites in January alone – testimony to the fact that the fire is still burning.

Like all cycles this one will work its way out and prices will rise again, and the bold will capitalize. The veneer is covering some dirt, but cleaning can happen from the underside...

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