The end of the property boom?

You must either have balls of steel or the gift of foresight similar to Nostradamus to call an end to the South African property boom. But while the rapid recovery in property values in the past five years has the doomsayers calling the peak, they are perhaps less informed than the experts who will continue to make a killing in the property market. They are the ones that tend to ignore the noise and buy regardless — it's really just a question of where you invest.

Other property markets overheated

There are other parts of the world where property is substantially more overheated than in South Africa. There is definite evidence of a peak in the London property market, which has run 200 percent in the past ten years, and parts of urban Australia are also taking strain now that prices, especially in places like Sydney have seen gravity-defying gains. In London, there is an alarming number of 'For Sale' signs littering upmarket areas where investors are seeking to extricate themselves from a market they believe has peaked.

The most recent edition of US business magazine 'Fortune' reflects some of the global property craziness. It reports that property pessimists in the UK can hedge against the potential of a future property meltdown via the derivatives markets. Warrants are on offer that will pay off if British property prices fall. Yale economist Robert Schiller is looking to introduce similar products into the US market. They have not taken off as their providers may have expected in the UK, but increasingly investors are getting nervous about the global rerating in real estate prices.

Prices in the US are rising at a startling average of 15 percent per year — the market is slowing in the UK and showing signs of reversing some of its recent stratospheric gains. In South Africa, investors are still able to get substantially better value in Bishopscourt or Sandhurst than they could in Westminster or Manhattan. But the valuation gap is closing fast.

Property prices will not always rise

We operate on the assumption that property prices will always rise. That is not so according to Schiller, who has done research on 115 years of property ownership in the US. He found real house prices can decline for years on end, as they did from 1900. Real house prices in 1980 were no higher than they were in 1900. The rally in house prices since 1990 has no historical precedent — so the reality is that we have no benchmark against which to measure our current experience.

Who are the real suckers?

The issue in South Africa is: Who are the real suckers? Those who wait for a correction and miss out on predicted upside of more than 20 percent this year, or those who jump into the higher end of the property market in the hope of making a fast buck?

Realistically, you have missed the massive rerating at the upper end of the market. Where you may see some gains however, is in the middle market where houses valued between about R450 000 to R750 000 are currently seeing the fastest price gains.

Market activity has decreased

The latest FNB Residential Property Barometer showed market activity has decreased, but the rate of growth in the middle-lower end of the market is not decreasing at the same rate as the upper-end.

"This could indicate that the next step of the property cycle is beginning to take place, presenting new opportunities," says FNB head of Home Loans Ed Grondel.

Can the growth be sustained?

There is plenty of activity too amongst first-time homebuyers who made up 32 percent of the market in the first quarter of this year — the question now really must be whether the frenzied appetite for the entry level market will be sustained to ensure today's buyers can move up the ladder tomorrow. That will be the crucial test for the sustainability of the growth we have witnessed since the turn of the century.

Article by: Bruce Whitfield - http://business.iafrica.com