Count your blessings
Low by international norms, prices for SA properties still have room to rise. The world has become nervous about the global property boom, since former US Federal Reserve chairman Allan Greenspan warned a few weeks ago that asset prices were too high and a correction was due.

Last week the Financial Times devoted a full page to what it headlined "Dangers of the great housing market delusion". In it, FT chief economics commentator Martin Wolf warns that since house prices in most developed countries have risen faster than incomes for almost 10 years, "only two possibilities exist".

"Either prices have to move to a higher equilibrium and purchasers will have to save more and consume less. That would have significant economic implications. Or they have reached an unsustainable level, in which case they will fall, in real terms. That would have far more significant economic implications," Wolf cautions.

A slew of data by the OECD group of 24 developed nations shows that real house prices - adjusted for inflation - in Britain, France, Australia, Spain and Ireland are several times higher than they were in 1970. (See graphs.)

But these same prices are up to 50 times higher than current SA prices for equivalent homes in Johannesburg and other major cities.

Absa's SA real house price index superimposed on the OECD figures shows prices have also risen at about the same rate as those in the developed countries since 1995.

On a historical comparison they are only about a third higher in real terms than in 1970. But real incomes have risen more than that in the ensuing 36 years and, while affordability has deteriorated markedly in most other countries, SA houses are actually more affordable than they were in 1970.

Absa senior economist Jacques du Toit says different factors are at work in SA. "Our economic boom only really started in 2003, while most of the OECD countries have been in a boom for more than 10 years," he notes. "We also have an emerging middle class of relatively young people while most of those countries have ageing populations."

Other factors supporting continuing price rises are falling tax rates, reduced transfer duties, the abolition of stamp duty on mortgages and strong growth in household disposable income. Though household debt is rising, at 65% of annual household income it is about half the household debt of the comparison countries. Household numbers are also growing strongly, along with a fast-emerging middle class and a growing scarcity of suitable residential development land.

Du Toit foresees a GDP growth rate of at least 4%-5%/ year for the next five or more years, "which will have a significant effect on demand for houses".

That SA prices have a long way to go is illustrated by comparing what US$1m (R6m) will buy you in various cities and countries (see table). Absa's average SA house cost is R4 100/m² - 2% of the cost per square metre of a house in London and almost half the cost of houses in Bulgaria, the cheapest in the FT table.

Even SA's most noted property bear, Erwin Rode, believes middle- and lower-priced houses have not peaked. "The upper market is fully matured and there is not much to gain from that," he says, "though the rest of market still has growth potential."

But even higher-priced properties in SA's cities are well below international levels, says Herschel Jawitz, CEO of estate agency Jawitz. He quotes expensive houses in suburbs like Houghton, Johannesburg, at around R8 500/m² - less than Bulgaria.

Jawitz sold a Houghton four-bed cluster unit at R11 000/m² less than the average house price in Croatia. The cost of a flat in Clifton at R60 000/m² is still lower than a house in Madrid.

This implies that even the high end of the SA market has some legs left, a trend that will become more pronounced as SA is promoted globally in preparation for the 2010 soccer World Cup.

The SA boom creates the danger of a growing wealth gap between South Africans who own homes and those who don't. This gap is already enormous.

Wolf says higher prices do not create more wealth for the country. Instead they redistribute income among residents: "If the market value of the stock is raised, those who own it are made better off by as much as those who will buy their houses from them are made worse off.

"Higher prices merely redistribute income, principally from the young to the old," he writes.

In SA the winners are established white owners and the emerging black elite on the one hand, while the losers are the majority of South Africans who are unable to get on the property ladder on the other.

The FT describes the frustration of middle-income people in cities around the world, who are unable to afford property. Typical is 30-year-old New York consultant Sarah Martin, who earns more than $100 000 (R600 000)/year.

She says she has browsed Internet sites but a one-bed flat in a decent area costs $600 000 (R3,6m). Perth financial adviser Andy Black says he plans to build his own home outside the city suburbs because prices are "crazy". And British artist Emma Callaghan has given up the idea of owning "unless the market crashes or I inherit a fortune from a long-lost relative".

Growing frustration among SA households who can't afford to buy or don't understand the importance of getting on the property ladder could have more serious social consequences, given the already wide wealth gap.

But Rode says this is unlikely: "Residential property prices are highly cyclical," he adds. "In the most recent boom, that of the early 1980s, it was argued people would never be able to afford to buy again. But prices fell and many people could easily buy in the 1990s.

"It will happen again. The upper end of the market is already mature and that will spread to the other price sectors in time," Rode predicts.

Du Toit says there is an outside chance that quickly rising house prices can lead to social instability: "But strong economic growth and fast-rising household income will bring a lot of new home owners into the market."

He also disagrees with Wolf's claim that higher prices do not create wealth.

"Again, the circumstances in SA are different," he notes. "Rising prices give home owners the opportunity to use their homes as collateral for further investment, to start businesses or improve their education."

Article by: Ian Fife - http://free.financialmail.co.za