Is minus 24% the new residential skim milk?

Posted On Thursday, 09 February 2012 02:00 Published by
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Erwin Rode and Associates, property economists and producers of what has popularly become known as ‘the Rode report’ have ruffled some real estate feathers with their latest missive

You could say that The Rode report just threw a cat among the pigeons:  Rode says that although house prices will increase marginally in nominal terms, they are in real terms still overvalued by 25 per cent. Seeff, Rawson and FNB all weigh in on the response.

Seeff Property Services chairman Samuel Seeff believes the report to be ‘one-dimensional’ and sends the wrong message to the ordinary buyer. This on the heels of an upbeat press release,earlier in January, stating that “this is probably one of the best buyers’ markets in decades. First time buyers and those looking for a second property can now find value in the market not seen for years. Buying in a down market can be one of the smartest moves, the bargain deals won’t last. “

Rode on the other hand says that ‘Correction’ will take time and he therefore recommends renting for the next five years as there is likely to be no significant capital growth over this period. 

Seeff though is sticking to its guns.“In contrast to the commercial market, the residential market is driven by emotional needs”, says Seeff. “About 95 percent of buyers are not looking for investment returns or rental income, but want a foundation upon which to build a life.” Seeff makes the point that regular buyers are aiming at acquiring a home either for the first time or to grow,or move closer to school or work.  “No value can be put on owning a roof over your head’s” says Seeff emphasising the investment in ones future and stability.

Other realtors have similar comments. Tony Clarke of Rawson’s property remarked that: “My prediction is no growth in real terms over the next year, two years, and thereafter slow growth starting at between 2 and 4% per annum. There is going to be a slow uptake in new development property entering the market, which from a first time buyer’s perspective will retain its value.”

Clarke points out that if one purchases property, rental on top of return needs to be factored in. Clarke also questions Rode’s position that first time buyers would do better to rent for the next five years or so and invest the difference saved on a bond. The question Clarke asks is “Invest in what? What he (Rode) is not taking into consideration is the fact that a lot of properties are being sold at a distressed level which is rightsizing property values anyway because those properties are in competition with normal properties.”  Clearly it’s going to take time before distressed properties cease being dumped into the marketplace and bringing real growth prices down.

Historically, house prices have escalated around 15 to 20 percent per annum between 2000 and 2007. According to the ABSA House Price Index, this peaked in 2004 at an average of 32.2 percent. In the two years leading up to the global housing market crisis of 2007, average house prices rose by 14.95 percent. Following the crisis, there has naturally been a significant adjustment with average prices now at levels last seen about four years ago according to Seeff’s earlier press release in January.

FNB’s House Price Index Report provides a more measured response by initially putting forward that its House Price Index showed a slight acceleration at the beginning of January, climbing from revised year-on-year growth rate of 4.7% in December to 5.6% in January. This is the highest year-on-year growth since August 2010.

However in real terms, the report points out that “the recent growth rates imply that real house price decline continues. Consumer price inflation for December (January not yet available) was around 6.1%, and a 4.7%.House price growth rate in that month translates into about -1.4% real decline.  This means that in real terms, the latest revised figures put the average house price in real terms (adjusted for consumer price inflation) at -15.5% lower than the peak of February 2008.”

And yet the report reveals that: “ our own FNB Estate Agent Survey had also pointed to a surprising slight improvement in residential demand in the 3rd quarter of 2011, and this is believed to have been feeding through into house prices with a mild lag.”

But what of Rode’s 25% overvalued statement? “This, we interpret to mean that it would require a very significant decline in house prices in real terms in order to get back to what Rode deems to be an ‘appropriately priced market’ that would be in ‘balance’ or ‘equilibrium." The report responds.

The FNB report posits that there may have been a little overreaction to it since Rode is not predicting a sudden price correction but rather a gradual decline over a few years.  The report goes on to debate the finer points of Rode’s methodology and technical analysis, tentatively discussing alternative criteria.

One can’t help feeling the conclusion is somewhat uncomfortable for the sombre bankers as they are left sitting squarely on the fence. The report concludes: “ So are house prices overvalued by 25%? We can’t contradict the statement. All we can say is that we believe that it is not possible to say.”  Isn’t that a little like the teacher saying “everyone’s special”?

But they do squeeze this in: “ while we have stated the belief that urbanization in SA should bring about significant long term increases in real property values,” you can hear all the realtors say ‘yay!’ “…we must distinguish between the long term, and the ‘shorter” term. The long term move to higher real property values doesn’t happen in a straight line, but rather in big cycles driven by shorter term fluctuations between supply and demand. And indeed, in the near term we are also of the opinion that real house prices will decline further.” You can almost hear the realtors sighing ‘ahhh!’

In the end, as has been suggested, the market is simply unrealistically priced. Rode’s report has challenged what might be wishful unrealistic optimism on the part of realtors as they try and boost the image of a depressed market, but they and others like FNB haven’t taken it lying down either, challenging the methodology of Rode’s otherwise respected report. The healthy debate keeps the industry honest and perhaps positively realistic in the outcome.


Publisher: eProp
Source: eProp

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