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Feb 09 2012

SA’s property bubble – another rejoinder

Published by at 6:47 pm under South Africa,Top Stories

Twenty-five percent and five years. Those are the key statistics for property owners in South Africa as from now. 

On 11 December 2008 I first suggested SA’s property market is hugely overpriced. And that a long period of slow “price rectification” was facing South Africans. In 2010 I repeated the mantra. In October last year my “gut feel statement” got some serious support and scientific backing in the form of SA’s property guru Erwin Rode (read here).

Today I received his latest newsletter with the best analysis of the situation I’ve seen to date (read here).

In short: real property prices* are on average 25% too high and it will take many years to deflate this price bubble. He suggests five years of five percent per year declines (in real prices!) are what we may see.

* A real decline/rise is what you get when you deduct the inflation rate in a particular year from the nominal rise in that year. (Or add it to a nominal decline!) For example: nominal house prices rose on average 1% in year x; in the same year building sector inflation came in at 6%; in year x real prices would then have dropped by 5%.

So, what would a realistic purchase price be for the average house advertised for R2 million today? R1.5 million. You could also hang on and sell it for R1.59 million in 2017. (Based on assumption of a 25% drop in real prices in the next 5 years.)

Life is tough – and then you die.

 

 

One response so far

One Response to “SA’s property bubble – another rejoinder”

  1. Christoon 29 Mar 2012 at 10:39 pm

    I’m glad to see Erwin Rode stuck to his guns in his latest property newsletter (here). He also replied to the view of John Loos of First National Bank, who disagrees with Rode’s 25-percent-overvalued view. Of course, Mr. Loos MUST talk life into the housing market – it’s his job. Should he go public with a view that he agrees with Rode, he would be without a job almost immediately.

    Because, SA’s banks are the biggest (residential) property owners in SA – against their will. Talking the market down under these conditions, could quickly turn into a disaster for the banks.

    Remember, the banks caused the bubble with their greedy, overaggressive extension of loans (credit) for years. Since 2009 they’ve been trying to rectify the situation in an orderly way, or slowly deflate the bubble they built, by being very strict with new-loan extension.

    A side-effect: many houses landed on the market when owners could not afford them any longer. When no takers pitched, the banks ended up with them on their books. They want to get rid of them, but that will only happen once inflation has “evened out” the imbalances caused by the banks. At this stage, the banks need Erwin Rode like a hole in the head.

    Christo

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