Time to burst the bubble theory

As some property economists search for reasons why a bubble exists in SA's residential property market the sector continues to make strong gains. Furthermore, The Property Magazine publisher Tony Vaughan says the bubble arguments are unsound.

Vaughan says many South African economists and market commentators are pointing to the fact that in some cases it may be cheaper to build than buy and so argue that building will escalate, properties for sale will not sell, and the bubble will burst.

"But this is an absurd and deeply flawed argument," says Vaughan, "because properties in cities such as London, Sydney and Los Angeles cost three to four times more to buy than build.

"These properties are priced as in any free market according to supply and demand and not replacement cost."

He says it is alarmist for some sectors of the media to keep talking of a bubble when SA has such positive economic fundamentals and is in dire need of more houses.

"It is accepted worldwide that an economy builds more houses in a strong property market and that, while we still have people living in shacks in SA, all sectors of the property industry, the media, government and the man in the street should be working hard to keep the property market strong and in a healthy condition."

He firmly believes that a bubble does not exist in the local property market, and that the strong gains made in recent years simply reflect a "catch-up" to global prices and growing demand from the emerging middle class.

Vaughan says local properties are still much cheaper than comparable properties abroad, and maintains that a bubble scenario is unlikely to develop.

He says one-bedroom flats in London are selling for R3,5m, but you can still get a three-bedroom home with beach and mountain views in Cape Town for that price.

Article from: www.netassets.co.za/