Property price statistics: who's fooling who?

Property man dissects house price figures - and finds they are not worth the paper they are written on. Here's his alternative.

Lies, lies and statistics. That seems to be what we are getting in relation to residential property prices, says Brian Black, a man with more than 20 years of property experience. Here is his down-to-earth take on the slew of monthly house price data we receive these days:

Just take house price indices which were recently released at the same time. Standard Bank's numbers show a 1,8% decline on an annual basis in the median house price; Absa shows an average nominal house price growth of 1,7% on an annual basis; FNB indicates an average house price growth of 2,3% on an annual basis; and ooba shows an average house price drop of 5,5% on an annual basis.

While banks and bond originators use the properties on which they have granted bonds to arrive at these indices Rode & Associates use all the deeds office transfer information, but unfortunately this is at least six months out-of-date in relation to the current market.

But here is the problem with any of these methods:

Eighteen months ago a bond of R620 000 would have required a payment of R6 827 per month. That same payment would only get a buyer a bond of R505 000 today.

What this means is that because of affordability, buyers are forced to buy down and now the "economists" are saying these statistics are showing a drop in house prices. That is like saying if the average shopper could afford to buy R2 000 worth of groceries per month last year but can only afford to buy R1 500 per month now, then food prices must have dropped by 25%.

While one economist is quoting an increase in property prices another is quoting a decrease. This is usually caused by one quoting real prices and another quoting nominal prices.

Talk about confusion. The average property owner is not an economist and is generally only interested in the nominal price changes.

If a property sold for R600 000 a year ago and would sell for R624 000 today then in nominal terms the property value has grown by 4%.

If however the inflation rate for the year was 11,7% then in real terms the property value has fallen by 7,7% (11,7% - 4%).

So with buyers buying down, how does one ascertain exactly what is happening in the property market? The only way to do this is by comparative market analysis. This is done by taking suburbs which consist of similar properties throughout.

Then find local estate agents who have been active in the area for a number of years and have kept accurate records of selling prices and ask them to compare the selling price of a property in the area today to the actual selling price of a similar property a year ago.

Experienced agents also know that the price can be affected by the condition of the property when sold and can make allowances for this.

So no matter what you might think of estate agents, the experienced area specialists are better than any economist in telling you exactly what is happening to property prices.

Any other method of measuring property price trends is simply lies, lies and "inaccurate" statistics.

Many are watching international trends and using this as a barometer of property price trends, while they seem to be totally ignoring a unique situation in South Africa

South Africa's property market was divided into two completely separate segments by apartheid. The mid-market, which today is priced between R600 000 and R2,8m, is predominantly the areas previously designated as white areas. The lower end property market is in areas previously designated as "townships".

The mid-market has traditionally shown good growth while the township market stood reasonably still for a number of years. The result of this is that it has been difficult for a homeowner in the lower market to sell a property at a profit and upgrade to the mid-market.

This is extremely important in our market as only 16% of buyers in the mid market are first time buyers compared to 63% in the lower market. So the real growth in demand is actually happening in the lower market and without these property owners being able to upgrade, the mid-market will stagnate.

This is especially true if only 16% of mid-market buyers are first time buyers but 18% of the sellers in this market segment are emigrating, which is exactly what is happening.

I predict that the property price trend over the past three years will soon flip this property market on its head. While the mid-market prices have slowed in the past two years the lower market prices are surging ahead.

Some of these lower market areas showed a 31% increase in nominal terms last year and their growth continues. Areas such as Khayelitsha have shown more than a 1 000% increase in nominal prices over the past three years.

What this means is that the huge price gap that existed between the lower and middle market is now closing and in all likelihood will be completely closed within the next two years. If you are wondering what this means, it means that in all likelihood South Africa will experience another property boom within the next two to three years and real integration of all our suburbs will finally take place.

About the expert: Brian Black has been a joint managing director of Bill Rawson Estates, managing director of the ERA Steer property group and a regional director of Multi Listing Services. He is now 50% shareholder of Intaba Solutions, which has developed a credit life-type insurance for homeloans and a rental guarantee offering for residential rentals.

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