With inflation (CPI) at 3.7% y/y in February (Stats SA) and nominal house price growth declining in February y/y, as is predicted for the first half of this year, the real value of your house was eroded for the second month in a row and by 4.4% y/y in February.
As the year progresses House Price South Africa will be tracking this trend with you. Simply sign up at the top right of this page to receive free updates as the picture emerges.
Looking back in history to the end of the 1980’s boom, real house prices fell then for 35 straight months in a row from February 1984 to December 1986.
Could this be on the cards once again for South African property?
If we consider how similar the real house price pattern is to date to the classic Jean-Paul Rodrigue bubble curve, and considering the highly uncertain and fragile economic environment we find ourselves in, it certainly looks more like a probability than a possibility.
Recently House Price South Africa has received a number of questions about whether it is now time to sell up in South Africa and move money into other investment classes, or into overseas property.
The answer to this question is a little more complex than would at first seem at face value because it depends on your personal circumstances and property objectives. According to ABSA house price data, nominal house prices actually peaked in June 2010 while real house prices had already started to fall by August 2007.
1. If you are a property flipper, making money off buying and selling property in a rising market, then the nominal growth is out the market and you should be looking to sell to minimise monthly losses where there is no reasonable hope for growth outweighing monthly cash flow losses. When interest rates start to rise it will be much harder to sell at today’s price.
2. If you are a long term property investor investing for regular rental returns, then this decision will depend entirely on the health and profile of your portfolio, and your personal ability and enthusiasm for managing property in an increasingly demanding rental environment.
3. If you are a home owner who owns a property to live in, then the timing doesn’t matter. This is simply because when your home price is higher, so is everyone else’s and vice versa. Timing the market does not apply to you, so you can relax!
4. If you are starting out and trying to build up an investment portfolio over time, so that it matures around the time you retire and provides rental income, then don’t stop buying. Mortgage loans are denominated in nominal terms and history tells us that it is unlikely that nominal prices will fall significantly. Just have a look at the nominal house price history in South Africa here. The earlier you start paying down the loan, the quicker the property will become cash-flow positive and the closer you will be to realising your cash-flow objectives. Years pass quicker than you think, don’t waste them!
5. If you are a fairly recent property investor then you may be hurting right now as expected growths have failed to materialise. If you bought most of your properties in the mid 2000’s to late 2000’s, it is likely that you are suffering from a negative cash-flow portfolio with no decent growth in sight. Depending on your personal circumstances you could try to create some breathing space by selling your worst performing properties and consolidate, then watch the trends carefully before making your next move. In the meantime focus on the fundamentals! Your salary contributions combined with tenant rent will gradually pay off the property and you will have future cash flow that will allow you some freedom from the corporate world one day.
6. If you are not a property investor but are looking for a nice home for your family to live in and are wondering whether to buy or rent, then it is important to note that you can often rent a better home to live in than buy. Remember if you want to invest in property, you don’t necessarily have to live in it yourself! Buy a sensible investment but stay in a home that makes you and your family happy and healthy. If you want to make money from property you need to buy assets that put money back in your pocket, having a big expensive family home won’t put money in your pocket every month – although you can leave it in the will, or use to trade down to a smaller retirement home plus some change!
7. If you live overseas but still have a South African property that you are holding on to, then it might make the most sense to sell. The UK and US property curves are ahead of SA. If you are living in one of these countries and need extra money to improve your home and living standards there, then you could sell up in SA and buy at the bottom of the curve in your adopted country.
At the moment South African real house prices are falling and seem to be following the Jean-Paul Rodrigue curve. Could we be facing another 30 months of real house price month on month falls as seen in the 1980’s?
House Price South Africa will be tracking the actual property price curve as it unfolds in South Africa versus various industry expert predictions. Please add your own prediction here too and join in the conversation!