Property Talk

Author: Andreas Wassenaar
Date: 2014-03-21

It's all about the price. In a market economy prices embody a host of information. House prices reflect the demand and supply forces within the property market and can reveal underlying trends and cycles.

Factors such as consumer confidence, household finances and debt levels and economic conditions combine to drive demand for property up or down. Absa's recently published House Price Indices report reveals price movements across three broadly defined segments - small homes (80-140 sqm), medium homes (141-220 sqm) and large homes (221-400 sqm).

The figures as at the end of February 2014 show nominal year-on-year growth rates of 1.3% for small homes, 6% for medium homes and 7.2% for large homes. Once these figures are adjusted for inflation we see that in real terms small home prices declined by 4.6%, medium home prices declined by 0.9% and large home prices increased marginally by 2%.

Absa's house price indices are compiled from mortgage applications received and approved by Absa. It is interesting to see how the growth of the larger more expensive homes has been so much more significant using Absa's house prices.

Despite our national economic growth rate taking a pounding in the third quarter of 2013, to end the year at a pedestrian 1,9% growth rate, due to massive disruptions in production on the back of labour strikes, the forecast for 2014 is far more positive.

A GDP growth rate of 2,7% is predicted for 2014. You can think of a rising tide raising all ships. As our economic growth improves, disposable income and the capacity to service debt increases. With that consumer and business confidence increases and people are more inclined to make longer-term property buying decisions.

There is no doubt that the greater Ballito area is a current property hot spot. It appears that every second enquiry for property comes from somebody migrating down from Gauteng. The local schools have grown from two to five mainstream institutions and each appears to be bursting at the seams.

Ballito is at that wonderful stage of its development where it is big enough to provide its residents with the range of amenities that are important to have on hand and at the same time small enough to ensure that traffic, congestion and pressure on services are manageable.

The delivery of new residential opportunities is starting to gain momentum along the Dolphin Coast. Producer price inflation for building materials slowed down to 6.64% in January 2014 from a peak of 8.4% in October 2013.

The devaluation of the Rand since then may well put pressure on building input prices so this will be interesting to watch. Essentially lower price inflation for building materials speeds up the delivery of new homes while higher price inflation tends to slow it down and make the existing stock of homes more attractive and price competitive.

A statistic I find fascinating is the FNB estimate of the National Full Title Property Replacement Cost Gap. This is the percentage by which the average property's replacement cost (i.e the cost of a new build) exceeds the existing home value (cost of existing homes).

Currently measured at 22.6% this implies that new homes should be trading at a premium of 22.6% above the price of the existing stock. It is therefore always going to be more cost effective to buy old rather than new and it is only the size of the difference that varies with the property market cycle.

For further information and an interactive analysis of this article follow my blog: andreaswassenaar.blogspot.com.

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