How to grow real house prices? Enrich the people


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.

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5 Responses to How to grow real house prices? Enrich the people

  1. CJ says:

    I am not so sure that real housing prices are on an upward trend since 1966 as you suggest – if I asked you in 2004 what the trend had been since 1966 you would have said flat or maybe even down. A bubble spike in the years since is too short term to be used to indicate a change in direction of the long term trend. Especially when the crash that will restore the bubble excess hasn’t played out fully yet.

    If the real price falls back to R400,000, as I suspect (and as history indicates), then the 50 year real price trend will once again be flat.

    I once read that there are stats in the Netherlands going back several centuries and they also confirm that over that time the real house prices didn’t change in the long term.

    In 1996 the 25 year trend showed real house prices were in a serious down trend. That isn’t any more correct than saying the long term trend today is up.

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    • Sure CJ, you are absolutely correct. By the way I know the work you are referring to. Here it is!
      http://www.eres2010.org/contents/papers/eres2010_392_De_Vries_HOUSE_PRICE,_HOUSE_Q.pdf

      True, the boom years are included in the calculation which make the result look better than otherwise would be. But as you say by the same token picking low years will also skew the result downwards. If you consider real compound growth 1966 to:
      1996: -0.64%
      2000: -0.07%
      2004: 1.35%

      If you look at comparable history in the Netherlands to what is being looked at in SA (ie since the end of WW2), the trend is up. The world population has also grown exponentially over this period due to the baby boomers and improvements in living standards.

      Note the major low points in the Netherlands seem to be caused by wars. Now if there was another world war with serious loss of life etc, then sure we would see another crash to those levels as there would be spare houses!

      But assuming that doesn’t happen and living standards increase over time and people continue to live longer then it is reasonable that real house prices would tend to follow suit too?

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      • CJ says:

        Interesting real price graph on page 5 of your link – 400 years of Dutch real house prices. Might be worth sticking it on your website.

        The first thing to notice is how the recent housing bubble is much bigger than any other bubble that has ever happened in 400 years – that is how out of whack house prices are in the Netherlands and the rest of the world.

        Take away the last 20 years freak peak and the 400 year real market trend seems to be flat.

        You could argue though that since 1800 the average real price average appears to be on an upward trend. Although, to counter that, you could also say that if you look back 200 years from 1970 the trend again looks flat.

        The vast fluctuations in real price show that historically there tend to be short term trends of 30 to 70 years followed by an equal trend for the same time period in the reverse direction.

        The 60 year uptrend has just peaked so that indicates that they are about to experience a 60 year downward trend. Which ties up with research out there that shows that property is going to be in the doldrums for decades based on the baby boomer effect (The baby boomers downscaling).

        Going on previous behaviour we can be sure that the huge bubble peak is definitely going to fall from 250 to 100 within 10 to 20 years … probably going all the way down to 50 within the 60 years. That means, compared to salaries, house prices will then be a fifth of the price they are presently.

        Ours parents were lucky to buy at this level back in 1955. They have since seen their houses increase in value 500% in REAL terms since then. “Buy property” they urge their kids, “look at us, you can’t go wrong” … the problem is, the people buying today could well be saying to their kids in 50 years time, “buying a house was the worst decision I ever made – in real terms it is now worth only worth a fifth of what I paid for it”.

        I suspect this 400 year graph is not too dissimilar to the what we would find in all countries all over the world, if the data was available.

        The truth is that property has had it time in the sun – the up trend peaked in a decade of sheer bubble madness and the fall out from that ended up bringing the USA and many other countries to their knees.

        People think the good times are going to re-emerge again just around the corner. I suspect the hard truth is, that property, for the rest our life time, is now going to under perform as an investment.

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  2. CJ says:

    A suggestion – maybe your main home url should open on the blog – thats why people come here. I still fear your blog is not being found.

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  3. Thanks for the feedback CJ.
    I have made some changes to the menu to hopefully make navigation a bit easier for now.

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