The Lightstone Residential Property Price Indices, released for the first time in April, provide some valuable new insights into the residential property market.
The indices cover the national market, as well as a number of key sub-segments
defined according to geography, property value and property type.
Lightstone uses the well-known 'repeat sales methodology' in deriving its
residential property price indices. The repeat sales methodology aggregates the
observed price changes in actual residential property units that have sold at
least twice within a specified period. The Lightstone Indices track the actual
changes in individual house prices within each defined geographic area, and are
therefore not distorted by changes in the mix of properties transacting during
the period (e.g. an increase in affordable houses being sold versus luxury
houses).
National house price inflation recorded 24% average for 2006, but is still on a declining trend
After 33% in both 2004 and 2005, the Lightstone National Price Index showed
average house price inflation declined to 24% in 2006. On a monthly year-on-year
basis, the growth trend remains steadily weaker, and had reached 19.4% by
December 2006. The downward trend is broadly in line with the other major house
price indices in the market, although the inflation rate is higher.
The important new insights, however, are gained when examining Lightstone's new
sub-indices.
Coastal Property suffers heavily as downturn gathers steam
The Lightstone Indices shed new light on the performance of genuine coastal
property. The Coastal Index tracks property prices for property within 500
metres of the sea. Comparing the Coastal with the Non-Coastal Indices, one sees
that coastal property's appreciation during the boom was nothing short of
meteoric. Its inflation rate significantly exceeded that of the non-coastal
segment from May 2002 to September 2005, the major part of the boom years.
The holiday/getaway nature of a significant component of coastal property
probably may have a lot to do with this market's performance. This would
arguably make the coastal market significantly more interest rate sensitive than
the inland market, as a sizeable chunk of this market would not be for primary
residential purposes and therefore would be less essential in nature. Thus, as
local property responded to massive interest rate cuts post-1998,
leisure/holiday buying may have boosted the coastal strip to a far greater
extent than the non-coastal market, which is probably far more driven by genuine
residential demand or by returns.
This is believed to be the key reason for the Coastal Index reaching a
monumental 64% year-on-year inflation rate in November 2004, while the
Non-Coastal Index inflation rate peaked at only 34% year-on-year in February
- The converse also holds. By December 2006, the coastal inflation rate had
dropped to 4.2% year-on-year, and prices had begun to decline on a
month-on-month basis. Rising interest rates (with this market arguably having
greater interest rate sensitivity) and a massive deterioration in coastal
affordability in recent years is believed to be responsible. By comparison the
Non-Coastal Index recorded a solid 20.3% inflation, having slowed far less
sharply.
Looking towards the lower end for better performance
Lightstone also groups areas according to the average price level of the units
in the area, classifying areas into 4 categories, namely "luxury", "high value",
"mid-value" and "affordable". This is as opposed to grouping houses according to
the price of each house. The logic behind this is that even if a certain house
is priced towards the top end of the property market, but the average price
level of its specific area is somewhat lower, the performance of that house is
more likely to follow the general trend of the area than the trend of its price
class.
For the first time, we can begin to confirm what many of us have long believed,
i.e. that the lower down the property price ladder one goes, the better the
price performance. As at the end of last year, that conventional wisdom still
held true.
During the major part of the boom period, from 2001 to 2004, it was the Luxury
Areas category that was generally the best performer in terms of price
inflation, followed by High Value, Mid-Value and Affordable in that order.
However, it would appear that the affordability issue began to creep in as the
boom progressed. The price inflation of the High Value segment overtook the
Luxury segment in mid-2004 before itself being overtaken by the Mid-Value
segment later that year. The Affordable segment became the star late in 2005.
Affordability aside, it is possible that something of a relative oversupply of
new housing stock developed towards the upper end. It was noticeable in the
building completions data that the average size of house actually rose steadily
throughout the boom years.
At the end of 2006, the relative performance still improved as one moved down
the price scale, but all categories showed declining year-on-year price
inflation.
Major Provinces - Gauteng, the solid one, KZN the sensitive one
Of the three major provinces, the Lightstone Provincial House Price Index shows
two of them were arguably more volatile during the boom years. From January 2000
to December 2006, house prices in Gauteng rose by 283%, Western Cape by 275%,
while KZN outperformed them both with a cumulative inflation rate of 296%.
Over this period though, Gauteng looks to have been the most stable of the Big
Three. At the height of the boom, Western Cape house price inflation peaked at
43% year-on-year in December 2004, and KZN at 41.1% in October 2004. Gauteng, on
the other hand, peaked at 29.6% in February 2005.
Significantly, Gauteng has slowed less sharply, and as of December 2006 its
price inflation rate was slightly above the other two, recording 17.6% compared
with 15% in the case of the Western Cape and 14% for KZN.
Of concern is the steepness in the pace of decline of KZN during the last few
months of 2006. It would appear that the decline suddenly picked up speed from
the middle of 2006. Could it be that this market is far more sensitive to
interest rate hikes than the other two? This could well be the case. It is
noticeable that back in 1998/99 KZN showed the sharpest price deflation and the
sharpest pace of short term recovery from late 1998 to May 2000
KZN's formal housing market is far smaller than that of the Western Cape even
though its economy is similar in size and it is far more populous. This is
because it a significantly poorer province on a per capital basis and a larger
chunk of the population lives outside of the formal housing market. Furthermore,
the province has a large coastal holiday property market, which is believed to
exert a more significant impact on the province's overall market than is the
case in the Western Cape.
KZN's holiday property market is very localised, with the inland provinces'
population being buyers on a large scale. It is believed that this holiday
property component of the KZN market is highly interest rate sensitive due to it
being less essential in nature. As a result it has dropped off quite
significantly due to deteriorating affordability as well as mild increases in
interest rates last year.
However, while KZN's decline in house price inflation is now showing a very
steep gradient, which could see it drop to very low levels very soon, the longer
term prospects for the province are positive.
The province has some exciting new developments in the pipeline. From an
industrial point of view, the La Mercy Airport and Dube Tradeport industrial
development are significant, facilitating a larger economy, while also
increasing the commuting population on the North Coast. Hand in hand with this
goes the re-development of the old airport for industrial purposes.
The Point Waterfront and Victoria Embankment Marina will play a crucial role in
rejuvenating parts of the inner city as well as in creating a very upmarket
precinct. This, together with the fine golf estate developments on the north
coast and upmarket game lodges further north, could increase KZN's attraction to
upmarket foreigners.
Of all nine provinces, the Eastern Cape was the best performer in the period
2000 to 2006. Although most of the smaller provinces are also showing declining
house price inflation, it is noticeable that their markets, generally speaking,
were a little slower in getting going at the beginning of the property boom, but
have held up for longer than the major provinces.
Major Metropolitan Areas - More evidence of coastal strain
House price indices for the major metropolitan areas (Metros) provide more
evidence of strain along the coast as opposed to the inland regions. Very sharp
downturns in year-on-year inflation are being experienced in eThekwini and
Nelson Mandela Bay, with Cape Town not far behind.
Nelson Mandela Bay had arguably the most impressive house price boom of the
metros, coming off a lower base, and its year-on-year price inflation rate
peaked at 47% in October 2004. By December 2006 this inflation rate had declined
to 11.2%. From a peak of 40% in October 2004, eThekwini's price inflation had
fallen to 8% by December 2006, and the gradient of the fall was very steep.
On a month-on-month basis, both Metros experienced price deflation by late last
year, eThekwini to the tune of -3.1% in December and Mandela Bay by a smaller
-1.1%. Cape Town was barely in positive month-on-month inflation territory at
0.2% in December. Its year-on-year inflation peak was slightly less extreme at
35.95% in February 2005 and by December 2006 its inflation had declined to
13.3%. The three major coastal metros are currently the worst performing
metropolitan property markets in terms of price inflation, with the eThekwini
and Mandela Bay weakening trend particularly sharp.
The Metro indices serve to demonstrate that a wider area than the Coastal Areas
(which incorporate properties within 500 metres of the coast) is experiencing
considerable strain. However, it is possible that the coastal part of these
markets does have a significant influence in the overall formal market.
External buying of holiday property may have served to create an affordability
problem for locals in eThekwini and Mandela Bay, but the external support for
the market may more recently have dwindled, leaving the locals to support a
market expensive relative to local incomes.
Freehold versus Sectional Title
Also unique to the Lightstone dataset is the split between freehold and
sectional title forms of ownership. It may come as a surprise to some that
sectional title property price inflation has been outstripped by freehold,
especially given the desire of many people to have secure cluster and complex
type living. Freehold consistently had a higher national inflation rate than
sectional title from 2000 to 2006, with a cumulative inflation rate of 343% from
January 2000 to December 2006, while the sectional title index managed only 207%
over the period.
It is difficult to compare the two indices on a national basis. Much sectional
title property can be found in out of favour inner-city, high-density
residential areas and it is possible that some of these could have dragged the
index down. However, we took Fourways in northern Johannesburg as an experiment
and found that freehold performed better there too - and there is hardly any
lower end property in that suburb.
Three factors may possibly explain the relatively poor performance of sectional
title. Firstly, during the boom years, land values appeared to have had a faster
rate of inflation than building values and one would guess that this is truer
around the major Metros where land scarcity is becoming an issue. With freehold
property being "more land relative to building", especially older properties, it
would stand to reason that price inflation would be higher in freehold property.
Secondly, much of the new property stock built since 2000 has been sectional
title, which is not always optimally located.
Much of the best infrastructure exists in well-established, predominantly
freehold areas. Although there are sectional title developments in such areas,
much of the sectional title cluster development takes place in more peripheral
areas. Finally, Lightstone believes that 47% of all transactions on sectional
title units since 2000 were driven by developers. The weaker inflation
performance of sectional title property could suggest that new stock had been
coming on the market above true market value.
With regard to the trend toward secure environments, it must be realised that
many upmarket cluster developments are indeed freehold as opposed to sectional
title.
In Conclusion
Quality data for decision-making in any market is a sought-after commodity.
The Lightstone Indices will be a valuable addition to the housing data. The data
confirms the broad weakening trend in house price inflation from around
late-2004. While weakening is broad-based, it indicates significantly greater
stress building along the coast of South Africa, especially in KZN and the
Eastern Cape. The data also enables us to confirm a general wisdom that it is
the lower end of the market that is the strongest, although both ends of the
market are tapering off for the time being. Finally, we will in future be able
to analyse the implications of two different types of ownership, namely
sectional title and freehold.
