## The importance of calculating REAL house price growth of your property

ABSA records the average South African house price in 1981 as R 50,143. By 2010, this has risen to R1,029,331. The series of all ABSA nominal house prices since 1966 is available on the front page of House Price South Africa.

For nominal house prices, no adjustment is made to control for the fact that the prices of many goods and services increases over time.

To assess the long-run growth of house prices we can calculate an annual compound growth rate. This is the year-on-year rate of growth able to account for the growth in house prices from the first year to the last year. It is calculated by subtracting 1 from the result of taking the nth root of the relative value in the final year, V, to that in the first year, A, where n is the number of years in the period being considered.
(1)

The annual compound growth rate for house prices in South Africa from 1981 to 2010 can be calculated by inserting the appropriate values into (1). This shows that house prices grew at an annual nominal rate of 10.98%.

(2)

If we now do the same calculation for REAL house prices calculated in equivalent 2008 money, we can substitute in the REAL house price for 1981 of R642,860 and the REAL house price for 2010 of R921,514.

(3)

This shows that REAL house prices actually grew at a compounded annual rate of 1.25% since 1981.

Now let’s consider what this picture would have been if you had sold up in 2000 and missed out on the property boom.

(4)

In 2000 you would have sold up at a real price of R434,980 versus a real purchase price in 1981 of R642,860, realising an annual compounded real loss of -2.04% over those 20 years. The real terms loss would have been masked by the nominal price gain between those years. If you had an average house you would have sold in 2000 for R271,862 and bought in 1981 for R50,143 – a nominal gain of R221,719.

You can use this formula to calculate the real return on your property. To find out how to calculate the “power” in Excel click here for an explanation.

Of course for rental investors, property price gains are less important as rent collection is the prime objective. However it is good to understand how the value of your portfolio is growing over the long term.