Making sense of the Residential Property Market

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Making sense of the Residential Property Market
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Property is big business
Property is probably the biggest business in the
world and yet less scientific research takes
place in this field than the stock, bond or
foreign exchange markets a situation which
urgently needs to be rectified.
(Tony
Ketcher, CEO of Standard Bank Homeloans Division)
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The Property Cycle
House prices doubled since 1998
South Africa experienced its highest real
increase in house prices in any month since
October 1981 in November 2003.
Source ABSA House Price Index
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International Price Increases
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New versus Existing Prices
Ave exist house price in Q3/2003 R428 200 Ave
new house price R582 300 (A
differential of 36)
In 1983 the all-time high was R450 000. There was
almost no difference between new and existing
house prices
For the past 13 years EXISTING HOUSES have been
selling at BELOW REPLACEMENT cost.
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New versus Existing Prices
Current Differential 33
Prices in the exclusive up-market suburbs have
now reached the
irrational exuberance phase', where prices are
now above replacement cost. (Rode, 8 April 2004)
House Price Index
Building Cost Index
SECONDARY HOUSING MARKET
WHEN BCI gt HPI IT IS CHEAPER TO BUY THAN BUILD
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Affordability of Housing
House Prices versus Remuneration (Annual Average)
(Source Rapport, 25 April 2004)
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Affordability of Housing
Mortgage Bond as of Disposable Income of
Households
(Source Rapport, 25 April 2004)
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Trends in international property prices
Price of 2 bedroom Flats in the CBDs (m, 2003)
(Source Rapport, 25 April 2004)
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Trends in international property prices
Highest to date in All these countries
SA still has a a long way to go
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INVESTORS RESPOND TO THE TRENDS

• Because financial markets world wide are
  turbulent and uncertain, many investors are
  showing renewed interest in property investment
• More than HALF of the worlds wealth is
  invested in PROPERTY
• The past 20 years house prices in South Africa
  has exceeded inflation by 35
• This makes South Africa one of the top
  countries in the world as far as property
  investment is concerned

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INVESTORS RESPOND TO THE TRENDS

• The striving for a happy retirement received a
  serious setback when many UK companies closed
  their pension schemes to newcomers or simply
  could not pay their pensioners
• Meanwhile house prices increased by 25 last
  year, and by 10 so far this year
• Therefore 66 of British people believe property
  is the best investment in the long-term
• Many doubt the safety of investments in shares
  for pensions
• 32 say that property forms part of their
  retirement plans
• 13 say property will be their main source of
  retirement income (Survey by the Association of
  British Assurors, as reported in Beeld, 25
  October 2003)

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Return of the Institutions
Residential Investment Opportunities
Source Harry Boonzaaier, HABITAT
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Trends in Emerging Black Market

• The emerging black middle class is important.
  'Four years ago the black middle class accounted
  for 7 of our business, now it is over 20
  (Ron Ennik, MD of PGP Gauteng.
  Business Day, 11 February 2004)

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TEST FOR THE SA PROPERTY BUBBLE

• A bubble in any market refers to a situation
  where prices are heavily inflated and continue
  increasing without obviously sound reasons.
• When the bubble bursts, prices fall rapidly or
  they increase at significantly lower levels.
• Most important Property related factors
• The Affordability of Housing
• Real House Prices
• Price difference between new and existing
  houses
• Interest Rates
• Debt levels of Households
  (Jacques
  du Toit, Senior Economist, ABSA, as reported in
  Beeld, 12 November 2003)

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DRIVERS GOING FORWARD FROM 2004

• Emerging black market
• Interest rates
• Turmoil in the market
• Investors / Rental returns