Global Property Guide

Financial Information for the Residential Property Buyer

The word inflation is almost onomatopoeic. The word assails the senses. You can hear the price balloon inflating, feel your wallet grow empty, see your assets eroding and smell fear. 

 

The South African Reserve Bank defines inflation as the persistent increase in the price of goods and services. The folks there aim to moderate the effect inflation on our economy. Their noble efforts are described in their mandate, namely, to implement an ‘inflation-targeting monetary policy’.

 

Generally, inflation has a negative connotation. But asset price inflation seldom receives much attention. A good example is the real-estate market. House prices have consistently risen far above that of the consumer price index (CPI). In South Africa house prices have increased by over 300% over the past decade.

 

Many people find it bizarre that, while general inflation is seen as "bad", house price inflation is seen as "good".  But that's perhaps because unlike the prices of ordinary goods and services, which can spiral out of control, factors impacting on asset price inflation collude to impose a price ceiling relatively quickly.

 

The result of exponential house price growth (rather than a linear or cubic path) means that eventually simple affordability will limit further house price inflation. With a surfeit of homes on the market, fewer buyers are found. There is competition to find buyers and property prices are reduced (deflation) by the bargaining power of qualified investors. The consequence? The housing market slows down.

 

Data from the South African Property Transfer Guide (SAPTG) shows that by the middle of 2008 house price inflation began dipping into negative territory, continuing well into 2009.

 

By the third quarter of 2009 though, green shoots (signs of recovery) were discerned. The rate of house price decline began to slow.

 

The current picture in 2010 is one of guarded confidence. Despite there being a lag in the recovery in sales volume, house price inflation has returned to South Africa. This is great news for homeowners since their asset is growing in value. Good news too, for mortgagees, as loan-to-value ratios (LTV) become more biased in their favour.

 

Nevertheless, for at least another 2 years it will remain a buyers’ market. High household debt levels, an economy in recovery mode and banks’ low risk appetite conspire against a buoyant real-estate market.

 

Yet qualified buyers are still being found, daily. In South Africa, over 35% bought their property cash in the past 12 months. No crisis here.