Comparing South Africa’s real house price curve with UK and the US. Could real house prices in South Africa fall by 20%?


Fig 1: SA, UK, US real house price curves since 1981

Looking at real house prices charted since 1981 for SA, UK and the US it would appear as if SA and the UK are still in for some real house price falls before the cycle has properly corrected.

If we look at the US chart, which started its boom and bust cycle first, real house prices have fallen back to what they were in the peak of 1980. UK real house prices on the other hand are still well above the peak seen in the 1980’s and so are South Africa’s.

Real house prices last peaked in South Africa in 1983 at R725,056 in 2008 money. If the US pattern is anything to go by, could that be the region that real house prices could fall back to in South Africa? Right now real house prices in 2008 equivalent money are R921,513. A fall of 20% would get them back to peak 1983 prices.

So how could this happen?
1. Through further nominal month on month house price falls, like what has been since in SA since April 2010 (although this has flattened out in Jan 2011)
2. Through house prices growing slower than inflation (this is less obvious but has the same effect on real house prices)

If predictions of rising inflation materialise (and already we are seeing rising food and fuel prices) then this could well be how South African real house prices correct themselves.

If you consider population growth, a buffer for SA must be that the population increased by almost 74% between 1980 and 2010, and look at the steep rises since the 60′s. Although the effect on housing is still to be properly felt by the population growth since 1980, some of these and also pre-1980 would be now be featuring in ABSA numbers in terms of the emerging middle class first time buyers.

Still, the US increased by 38.4% and you would have expected the US to withstand a little better given that most of this population growth would filter through into formal housing stats?

The UK is interesting given the very low 9.9% growth, and with fears of inflation there is room for prices to fall in real terms. However, the US and UK house price dynamic could well be impacted by a supply side factor where houses are over supplied in the US and under supplied in the UK.

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11 Responses to Comparing South Africa’s real house price curve with UK and the US. Could real house prices in South Africa fall by 20%?

  1. Dewald says:

    When the interest rates in SA start climbing the correction will begin, so a lack luster property market now even with the low interest will look rosy if interest rates start rising. The SARB needs to decrease the money supply but it probably won’t work as other much bigger players are increasing the money supply and it floods the emerging markets. So save now and buy when the interest rates peak.

  2. Devil's Advocate says:

    Might I throw a spanner in the works here and suggest that population growth has almost nothing to do with property prices and bubbles?

    Using demographics in isolation we should find booming property markets in Liberia, Uganda, Yemen, Gaza, the DRC and Burundi – and yet these countries barely have a property market, let alone a bubble. Likewise, if demographics played a role Russian property would be plunging in price along with that country’s plummeting population; and yet Moscow property continues to be some of the most expensive in the world.

    The reality is that social and political realities dictate property growth as much as economics do. Of course there’s no bubble in Libera because Liberia is a shit-hole. Of course there’s no crash in Moscow because that’s where the oligarchs live and play. I would suggest we need to go back to your graphs and read between the lines, not just look at broad sweeping indicators.

    For example, it doesn’t surprise me at all that the US has almost reached its long term average despite it’s relatively high population growth: the US has always had high population growth. It is a stable and settled economy. It’s been doing the same thing for seventy years, using the same skills and the same workers, trained to do the same things. Yes, a larger cohort of Hispanic workers is emerging in the US, but they are simply doing the jobs whites did in past generations. Nothing is really changing. So now that the US has got the fraud and bubble-mania out of its system, it’s back to business as usual.

    The UK has always been prone to boom and bust in property because the English are so obsessed with owning their homes. After a Thatcher-fuelled bubble, and then a Blair-Brown bubble, they will slump back to a new trough and wait for the next bubble. They are addicted and beyond help.

    But South Africa is profoundly different for one very clear reason: we are NOT doing business as we have done for the last 70 years. In an incredibly short time we’ve gone from essentially a kind of Soviet labour system (massive exploitation of the majority for the extreme enrichment of a few) to a messy, shaky but very real democracy. South Africa in 2011 is utterly different from SA even in the late 1980s, and as such most graphs and long-term models are irrelevant. The one graph you need here is not real house prices, but NUMBERS of houses – you’ll see an exponential rise in the sheer number of properties bought – and bought outright.

    Yes, we are due a correction. Yes, some areas have been grossly overdeveloped and are going to take a severe hiding. If you own a holiday house anywhere near Plett, you will NEVER sell it, EVER – might as well give it away while you still can. But we can’t say for sure what will happen to the rest of the country. We need SA-specific stats.

  3. CJ says:

    Nice graphs. Notice that the US bubble peaked at about 70% overvalued compared to the norm of around $150,000. The market has nicely crashed down to near that point – the US crash is performing as it should – that’s why you can buy 3 bedroomed houses in Detroit for $10,000 and an acre plot for $2000. There will still be further drops as crashes tend to overshoot the norms – so lets hit the $125,000 average price and we could be at bottom.

    Now the UK graph shows prices at peak were 150% over valued compared to the £80,000 norm. Prices there need to drop to £75,000 from the present £160,000 – so a 50% drop needed there – it is not happening because of government interference because they fear for the banks. Artificially low interest rates are protecting the market from crashing – but you can’t interfere with cycles – that line HAS to head down there – you can do it fast like in the US or you can drag it out for ever like Japan has done over the last 20 years.

    Incidentally, the UK graph looks like it has just had a classic bull trap (a temporary blip up that is normal in crash graphs) – when that blip returns to where it turned up, which it has just done, there is usually a quick plummet that follows.

    SA also shows housing was 150% overvalued at peak. We need far more than a 20% real drop to bottom – we need to get all the way back to R400,000. That is over 50% real drop. We admittedly have higher inflation than other countries so that will help. But basically the SA housing market at present seems to be in total denial. People seem to think that if they wait long enough prices will start moving again. What they don’t realise is that the reason people are not buying their houses is because compared to salaries, they are twice as expensive as they should be and as they were in most of the eighties and nineties.

    People think the bubble in the last decade is normal housing behaviour and those glorious days will soon return. In reality the huge housing bubble was a freak, seen maybe once every century, and this time round it almost destroyed the world economy … it will not be seen again in our lifetimes. For many years we will be paying the price of this greed. And only when real SA real house prices have fallen 50% or so, will that penitence period for past sins be over.

  4. CJ says:

    Thank you for running with the suggestion and for the great site. You are the only person I have come across in SA doing this stuff and showing what is happening using graphs. I have been talking about this for years on realestateweb and capetownbubble.blogspot, but you have done stirling work in compiling the data and putting the graphs online.

    People should spread the word about this site, especially to the mainstream media, because there is so much ignorance, propaganda and plain old fashioned bullshit being spouted out there. What is shown on this site is good old fashioned data and cycles – you can’t mess with cycles – they happen, what goes around comes around. In every aspect of life they can be seen at work and house prices are no exception.

  5. Frank says:

    Devil’s Advocate makes some good points. There is an argumetn to be made that the SA property market was rerated after 1994, and with dropping interest rates, widening distribution of wealth and growing confidence in political situation. SA economy is no longer driven by a small minority, and demand for decent housing for this expanding group is rising. It’s not about population growth, it’s about growth in the population with increasing wealth.

    • CJ says:

      Are there more jobs in the new SA … or is it just that the colour of the skin of the people in those jobs is different. I would say it is the latter so I am not sure that would affect average house prices.

      Furthermore, if there are new jobs, are these higher paid in real terms than all the other jobs. If they are then you could argue house prices could rise and still be affordable. I suspect however that ignoring the BEE black diamond crowd, most jobs are still paid the same in real terms.

      In the old SA the railways was full of Afrikaners – now they are filled with Blacks and Coloureds.

      In the old SA the middle class was mostly white. Now hundreds of thousands of these have emigrated, to possibly be replaced by affirmative action positions – again, not an increase in demand, just a change of skin tones.

      If the market was rerated in 1994 as you say, it certainly didn’t show up in the real price graph which remained flat for another 7 years. The huge bubble happened at exactly the same time as the global property bubble so I don’t think you can say ours happened for a different reason.

      Our real price graph HAS TO drop. People always want to say “it is different now” … in reality it never is. The cycle continues. The driving forces behind it may change, but the end result will be the same.

      Sometime in the next, 5,10, 15, 20 years, the average real house price in SA will again be R400,000. Guaranteed.

  6. Frank says:

    And, by the way, ridiculous UK austerity cuts will cause untold damage to their economy, shrinking the effective wealth of millions. UK property market will suffer as a result. A vdery different outlook from the domestic situation here. In the US Obama is weakly fending off similar cuts… the jury is still out on US recovery – if the cuts are made, their recovery could be short lived.

  7. Frank says:

    “SA property market was rerated after 1994, and with dropping interest rates, widening distribution of wealth and growing confidence in political situation”

    After 1994, not in 1994, CJ. Yes it took some years for the penny to drop that SA was not about to implode, and with dropping interest rates and widening wealth distribution the property market took off, before FICA kicked in and put a well-timed lid on it. I am pretty sure that a lack of liquidity in our banking system because of past excesses will prevent a return to the boom times of the early naughties, but our consumer indebtedness is low compared to that in US, UK, and Oz. Together with a well organized bank/estate agent alignment, prices here might bumble along the bottom for a while, maybe drop a bit more, but crash. Not likely.

    • CJ says:

      Take your pick – higher inflation means less pressure on house prices to drop as the real price will fall the required 50% even with flattish prices … but higher inflation will force pressure on bond rates to increase … it will be a brave finance minister to keep bond rates untouched if inflation reaches say 10%. And if bonds go up then the pressure is increased for lower prices.

      Alternatively, we have low inflation, so we need either flat prices or small reductions for a long period of time.

      The reality on the ground is that people are paying twice as much compared to their salaries for housing than they were in the eighties and nineties – we need to return to that position.

      So keep houses flat while salaries double … or half the prices of house while salaries remain the same … or a combination of the two.

      We need to get to that 50% reduction.

      Sure SA household debt is less than in other countries, but compared to the 80s and 90s in this country it is about 50% higher.

      So high household debt, houses twice the price they should be, the next move in interest rates to be up, rising inflation, rising unemployment, strict lending criteria by banks, a dead housing market with huge stock of unsold houses … all in all the signs are for downward price pressure.

  8. Domz says:

    Wow, I wish that I had found this site earlier. I have just returned from Durban with a blank property sale agreement and had settled at my desk to pen an offer when I decided to scourer net for some guidance on an amount to offer for the 2 bed Essenwood maisonette that I’ve settled on. After reading comments on this site, I’m not sure that I should be making an offer at all.

    My sense is that its generally acceptable to offer up to 15% less than the asking price but if property prices are set to plummet by about 50% then I should leave my cash in the bank, right?

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