Virtuous Property Cycles

As property prices continue to streak ahead in their growth, home-owners are wondering just how much more the market will rise before settling down. There is another secondary cause for the sustained growth in price as seen by the huge increase in real value of residential buildings plans passed and real value of buildings completed. (64% and 53% respectively)

Home-owners are accessing this newly found wealth in the increased equity in their homes and a significant amount are using some of this money to improve the very home that gave them the wealth, further adding to the value of their home.

The last 3 years have seen property values increasing by more than 50% in most areas and this has added greatly to the wealth home-owners. These property owners now have a choice of using this wealth to move-up in their next purchase or improving their current property. They can access some of this equity via a further mortgage or accessing the paid up portion of their bonds, and use this money as a deposit on a more expensive property or they can choose to re-invest some of that equity back into their own home.

Given the high transaction costs of property transactions in South Africa where the frictional transaction costs can be as high as 25% of the value of the transaction, an increasing number of owners are opting to wisely use this wealth to further the improvements of their home thereby once again adding to the value instead of purchasing another home.

This building and renovating phenomenon is not restricted to individual homes but can be seen as a rash of building takes place within a suburb. Driving through some of the South Africa's suburbs shows that what seems to be a third of houses might be in the process of extensions and renovations in a hot area.

This wealth factor that has been created by the surge in property values over the last 3 years is partly responsible for driving the continued growth in the economy and while some of this money finds its way back into improvements the property values will keep on escalating.

This is the virtuous cycle; property values have increased substantially; this increase in wealth is either being used to purchase new homes or improve existing homes; the improvements in turn drive up the value of that home and enough improvements in an area drive up the value of an area; this again leads to more equity or wealth in the property and so continues the cycle.

Property owners need to be careful of overcapitalising in these phases and it is important to be in an area where the neighbourhood improvements can support this wealth creating/investment cycle.

Investors tend to look for areas that lend themselves to improvement and where the owners in that area are actively involved in the upgrading phenomenon as that is where they will get the best return in the shortest amount of time.

Article by: Dave Welmans - (www.thepropertygame.co.za)