property market is not about to collapse

Property market is not about to collapse - Rode
September 17, 2005By Charlene ClaytonThe residential property market in South Africa is not about to collapse, despite the fact that property prices have shot through the roof since 2002, Erwin Rode, a property economist, says.Rode was speaking at the annual conference of Rode & Associates held in Johannesburg and Cape Town recently.The price of residential property is at an historic peak, Rode says, describing house prices as "very expensive" compared with those during the previous property booms of 1984 and 1970. Another factor indicating that property prices are at "dangerously" high levels is that it costs significantly more to buy an existing house than to build the same house, Rode says.A comparison of the prices of old houses with those of new houses indicates that, after making adjustments for the age of existing houses, old houses are about 20 percent above their replacement cost, he says.The growth in house prices has significantly outstripped the growth in the consumers' income, and, as long as the banks limit lending (by restricting you to a loan on which the repayments do not exceed 30 percent of your income), the inability of consumers to afford property will place a ceiling on house prices, Rode says.House prices cannot continue to grow at the rates that have been experienced over the past three years, he says, and there is already evidence that the growth in house prices is slowing (see below "Going down").So, you should be careful if you are considering investing in the residential market. If you are intent on investing in this market segment, bear in mind that prices in the lower-priced suburbs have not run as hard as in the higher-priced suburbs, Rode says.Another speaker at the conference, Cees Bruggemans, the chief economist at First National Bank, says he expects interest rates to ease another two to four percentage points in the coming decade, and this should boost house prices. As long as interest rates do not rise dramatically, he says house prices should rise by about 10 to 12 percent a year.Although the levels of affordability (household debt relative to income) have deteriorated over the past few years, he says, affordability has not yet been pushed to unsustainable levels.Commercial alternativesRode says there are currently better investment options than residential property. There is plenty of growth to come from the commercial property market, which is segmented into the retail and industrial markets and office space.In the case of office space, Rode says, both vacancy levels and rentals have been decreasing over the past three years. When there are few or no vacant offices left to rent, Rode says, rentals will increase substantially as the demand overtakes the supply.Rode says for developers to make a 20 percent return on their capital from a new office building, they require a gross rental of R105 a square metre a month. This implies that office rentals will have to increase by 40 percent from their current levels.
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The boom in the industrial property market has already started, and this market continues to offer promising returns, Rode says.The best-performing property type in South Africa over the past 30 years has been the shopping centre, he says. Retail sales are still growing at about five percent a year, and South Africans are big spenders - factors which will continue to support the retail property market.He says individual investors who want exposure to the commercial property market can invest in property unit trusts (PUTs), which are collective investment schemes listed on the JSE. Rode says PUTs are poised to deliver attractive returns in future, because there is potential for their cash flow (from rentals) to grow significantly and for this market to be re-rated further.He says if you invest in a R1 million house - now regarded as the price of a house in the middle market - you can expect an annual yield (in other words, the rental return as a percentage of your investment) of about four percent. By contrast, Rode says, listed property (which focuses on commercial and industrial property rather than residential property) will give you an annual yield of about eight to 10 percent before income tax.Support for the marketBruggemans says the factors that will support the demand for housing, and hence the property market, include:
South Africans' income is likely to increase by, on average, at least nine percent a year for the foreseeable future. With an expected inflation rate of about four percent a year, an annual growth of nine percent indicates a real growth in income of about five percent a year.
At least another eight to 10 million people will drift to the country's cities over the coming generation. Also, it is likely that more people will immigrate to South Africa than emigrate from this country.
The scarcity of serviced land, due to the inability of municipalities to provide re-zoned land for residential use fast enough.
Social trends, such as rising divorce rates, the increasing tendency for adults to live on their own, and the popularity among higher- and even middle-income earners of owning second homes.
The demand for property investments.Going downAccording to the latest research from Absa Group Economic Research, house prices increased in real terms by 23 percent year-on-year during the first six months of 2005.Jacques du Toit, a senior economist at Absa, says although the growth in house prices was still relatively strong during January to June this year, prices have been declining (in real and nominal terms) since the third quarter of 2004.






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