Lightstone National House Price Index

Private Property South Africa
John Loos

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

  1. 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.

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