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SA Property Bubble - Talking about the bubble.

Supplied by Dave Welmans www.thepropertygame.co.za

There is a famous saying that goes "economists have as much success controlling the economy as weather men have of controlling the weather". In the last two years this observation has never been truer, the rand /dollar exchange rate being a case in point.

If you follow the financial news you will have seen our economists debate the subject of sky-rocketing property prices with equal passion. True to form, the camps are firmly divided. Some will tell us that SA properties are still undervalued and there is plenty of room for upward movement, others like Dr Adrian Saville Chief Investment Officer, Cannon Asset Managers claims "Property prices have run too far, too fast, too hard and the pace of expansion,[is] in a word, 'unsustainable'."

The word often bandied about when it comes to over priced property (or any commodity for that matter) is "bubble"

So what is a bubble exactly?

A property bubble is an unsustainable growth in property prices causing a collapse or severe correction at some point. We need to distinguish this 'bubble' from other type of bubbles. We've seen stock market bubbles and subsequent collapses over the last decade, most notably the tech stock bubble and dot com collapse which saw some high profile companies share price go from more than R71.00 to just around R3.00. Ouch! So in rand terms this means that a person who invested R50 000 at the top end of the market would have seen their investment dwindle to a mere R 2000. I know! I also got caught up in the hype. It was an expensive education and the reason I sit up and take notice whenever the word 'bubble' is mentioned.

To put this into propery terms, if your home is worth around R620 000 in the current boom, which is about the average price of a house, it would have to depreciate to R26 000 to be in the same league as the tech stocks described above. Although its virtually impossible for a home to devalue to this degree, it does not mean that we're not in a bubble. I'm just pointing out that the emotiveness of other bubbles might not be helping us deal with the current scenario rationally.

A real clanger of a property bubble was the great property bubble of the 1920's in the USA! At the height of the boom, unscrupulous salesmen were selling worthless swampland in Florida to ignorant investors from around the country for thousands of dollars that had never even been to Florida. The investors were caught up in the economic boom after the Great War and were looking to invest in almost anything. Large tracts of land in the sunshine state were thought to be a sure bet. These large tracts of land often turned out to be worthless swampland. This bubble burst with the onset of the Great Depression and when thousands of investors found they had been investing in something that was definitely not a sure bet and was only fit for alligator farming if they existed at all.

Tip of the Week
Beware of "snake-oil salesmen" selling you something you haven't seen. A picture can be very deceiving. Always ask for the square meterage of the unit, excluding covered patios, to give you an idea of the size. Watch out for time delays, and interest rate hikes. These are just two of the things that can make your investment head south. Check out the developer thoroughly.

Dave Welmans is the Co-Author of the book "The Property Game", a guide to property ownership in South Africa.

Click here to read Dr Adrian Saville's article on Property Bubbles.
Do you have any views you'd like to express on this topic? Contact the author dave@thepropertygame.co.za
The Property Game is available at most books stores now. Check the website for current stockists. www.thepropertygame.co.za

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