Housing: third quarter advice for investors

Private Property South Africa
Private Property Reporter

Over the past four years or so, since the end of the housing and economic boom, a financially pressured household sector has been searching hard for affordable options in the housing market. For a while, some “relatively” affordable options were available. Small-sized homes were perceived as significantly better value for money than larger-sized homes, and seeing better price growth as a result, while full title property appeared to offer better value for money after sectional title property’s price boom had outstripped that of full title back in the boom years.

In the boom years prior to 2008, the sectional title market was arguably buoyed more by first time and buy-to-let buying than was the full title market. Those two sources of demand are more cyclical than established family demand, which in turn arguably plays a bigger role in the fortunes of the full title market, especially the three- and four-bedroom full title segments.

So, in the good times, first time and buy-to-let buyers came to the market in far greater numbers than in prior weaker times, and we believe that this drove the sectional title valuations to a bigger “boom-time overshoot” than was the case in the full title market.

Therefore, at stages during the pre-2008 house price boom, the average price of a three-bedroom sectional title home, for instance, was in excess of 20% higher than the average for a three-bedroom full title home. The gap was still very significant as at 2009 just after the recession. However, thereafter this gap has steadily narrowed to a virtually insignificant 0.6%, as full title house price growth has exceeded sectional title price growth in recent years. As for other major segments classified by room number, the percentage by which the average sectional title two-bedroom price has significantly reduced (although the two markets aren’t exactly comparable, with two-bedroom full title being significantly more in the “Affordable Housing” market), while the four-bedroom sectional title average values are back below average four-bedroom full title values since late 2009.

What does the move back towards narrower price differentials (“normalisation”) between comparable full and sectional title properties mean? It means that the full title market’s affordability advantage that was built up in the boom period has probably all but come to an end. No longer is there that much advantage, from a price affordability point of view, in buying a three-bedroom full title home compared to a three-bedroom sectional title home for instance. Granted, full title often offers a spaciousness advantage, while sectional title perhaps offers lower operating costs, so the two are never entirely comparable. But the average price gap in this segment has virtually disappeared as a result of superior full title house price growth over the past few years. As for other segments classified by room number, the percentage by which the average sectional title two-bedroom price exceeds that of two-bedroom full title has significantly reduced (although the two markets aren’t exactly comparable, with two-bedroom full title being significantly more “affordable housing” developments), while the four-bedroom sectional title average values are back below average 4four-bedroom full title values since late 2009.

Therefore, it should come as little surprise that the average price growth rate of full Tttle homes, at 6.7% year-on-year, no longer far exceeds the 4% growth for sectional title homes, as was the case a few quarters ago. In the near term, we would expect the various segments’ price growth rates to move increasingly nearer to each other, with relative affordability advantages having been reduced over the past few years. This is expected to be the case, too, when categorising property by building size in square metre terms.

FirstRand Bank’s disclaimer for this article is here.

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