Why is it important to improve everyone’s wealth? The collective wealth of the citizens of a country is one of the key pillars of long term real house price growth. A population that becomes wealthier on average over time will keep real property prices stable or in growth over the long term. Economic growth and real house prices go hand in hand.
Real property prices typically grow gradually over time, and this is what long term investors know and understand. Between 1966 and 2010, real house prices grew at a compound annual rate of 1.66% per annum in South Africa, while nominal house prices grew at an annual compound rate of 11.23%. Any sudden movement in real property indicates the existence of a short term cycle, caused by a number of temporary economic factors.
These short term changes are sensationalised by the media and cause great excitement to property speculators who make their money in the short term buying and selling property. Long term investors however, will notice the change, make a few strategic purchases/sells depending on the phase of the cycle, then hit the snooze button and go back to sleep for another 15 years while the cycle runs its course.
The measure that is most commonly used as an indicator of a country’s wealth or standard of living is GDP. GDP per capita (at constant 2005 prices) for South Africa is charted versus real house prices below. In South Africa GDP per capita reached a peak in 1981, but then dropped back into a trough in the dark days between 1984 and 1994 before recovering again after 1994 through to today. If you compare this GDP per capita line to the real house price line, it is clear that real house prices have been much more volatile than GDP growth over the same period, and how real house prices are now well above the long term trend line. This is because they have been distorted by the short term property cycle that started around 2000.
A long term property investor can realistically not hope for much more than real house prices staying stable or growing gradually over time. Nominal house prices can bounce around quite considerably in the short term, but over the long term track inflation. This is the type of pattern that property investors have seen over the long term in South Africa.
So what factors will help to grow the REAL value of your property?
1. Real income growth of the population
2. Supply shortages (often caused by high real construction costs)
In terms of real house price fundamentals, that’s about it. All other factors are more likely to cause a temporary and unsustainable real house price cycle, but not deliver ongoing stability.
Real income growth: The wealthier people become in real terms, the better quality housing they can afford and demand. This increases the demand for better quality housing, which in turn pushes up prices. In a stagnating economy, where real living standards are dropping (think UK currently), the demand for affordable housing outstrips the need for better quality.
Supply shortages: this factor is most clearly seen in the UK market where supply shortages and high real building costs are literally propping up an otherwise overpriced market. Supply shortages have the biggest effect when they exist in an environment of already fairly high living standards and where the population is constantly growing.
The UN forecasts population growth to be stronger in the UK than SA over the next 40 years, due to a combination of strong average birth ratios per female, fewer deaths due to constantly rising longevity, and higher immigration levels. When it comes to immigration, not only is the actual immigration rate higher than South Africa, but there is a much more linear relationship between an immigrant arriving in the UK and the knock-on effect on the formal housing market.
Unfortunately there is not much price pressure coming from formal immigration in South Africa as there is in Australia, the US or the UK. In terms of formal immigration, according to Stats SA, more people left than arrived between 1993 and 2003. The UN further predicts more people to leave than arrive between 2010 and 2020. There is a real job to be done here in terms of attracting a healthy influx of talented people to South Africa who can make an economic impact and create jobs on top of the existing population.
So in summary, the health of South Africa’s real property price lies in constantly improving the wealth and living standards of the existing population through improving global competitiveness and job creation. A second opportunity exists by addressing the stagnating population issue.
But is South Africa hungry enough to compete with the likes of China and India? The world is hungry (literally), food and energy prices are going up and every day highly skilled people are prepared to work harder for lower wages. Even the UK has announced that it has to manufacture its way out of this mess and has dropped corporation tax in yesterday’s budget to prove its commitment..!
South Africa will need to find ways to compete harder on these tougher new terms in order to remain price competitive, grow employment, improve living standards and boost real house prices over the long term.