PDA

View Full Version : Houses overvalued by 25%? A rejoinder



Rudolph Muller
02-13-2012, 08:25 AM
It appears estate agents and house investors and other stakeholders in the housing market have experienced serious anguish and denial following the launch of Rode’s Report (quarter 4 of 2011) on 26 January 2012. At the press conference at FNB’s offices in Fairland, Johannesburg, I stated that houses were fundamentally overvalued by at least 25%; furthermore, that house prices will, as a consequence, decline in real terms over many years (unless one assumes a quick collapse like in the USA).
Estate agents’ anxiety can be understood as stagnant prices tend to be associated with fewer transactions and, therefore, less commission. Naturally, the messenger is to be blamed.

Our findings have three crucial implications:

Pertaining to mortgage lenders, prudent lending practice would dictate that 100% mortgage loans should be the exception. The claimed tendency for banks to once again start reverting to 100% mortgages is disquieting.


In the absence of expected capital appreciation, the man in the street who is contemplating buying his first house or who is relocating, should consider renting rather than buying. This is so because renting is now (and has been for many years) much cheaper than owning, with the help of your friendly banker. It is a false argument to say, “I do not want to make a landlord rich”, when one makes a bank “rich” by paying interest on a mortgage bond!


• Housing developers and building contractors face a prolonged period of modest activity.
By its very nature, a press conference has to be succinct and contain a minimum of technical clutter. In the process of converting technically robust analysis to popular text, some of the substance inevitably gets lost in translation. For this reason, and because of the uproar, I have decided to reproduce the article that appeared in Rode’s Report, to expand it slightly and to end this newsletter with a rebuttal of some of the criticism levelled at our method.

For the record, I suspect that many property practitioners and laymen who commented in the media did not understand my prediction as they did not read the actual research article in Rode’s Report. This is painful to me because it implies that there are property professionals out there who do not subscribe to Rode’s Report!

To add flesh to our forecast: should inflation (more specifically building-cost inflation) stay at, say, 6% per year for the next few years, and house prices rise at only 1% per year, then the annual real decline in values would be 5 percentage points (6-1=5). Thus, in this example, to correct the suggested 25% overvaluation would take five years (5 percentage points x 5 years (= 25%). Five years, then, of stagnation. This is quite feasible as South Africa and many other countries have had such a situation before, as the reader will see in the graph below. What is more, if we were to add the world economic prognosis to this cocktail, the reader will see Rode is from this planet.

In South Africa, house prices are still far above their long-term replacement-cost trend line, which is another way of saying houses are still seriously overvalued. The theory behind this statement is that the long-run driver of prices (or rentals) is building costs, a proxy for replacement costs. This can be explained through the substitution principle, which states that a buyer will pay no more for a property than the cost of an equally desirable alternative property (if prices are too expensive in Claremont, he/she might opt for Durbanville). For example, why would one buy a newish used house for, say, R120 when you could have it built for R100?

http://www.moneyweb.co.za/mw/view/mw/en/page292525?oid=561786&sn=2009+Detail&pid=287226

McT
02-13-2012, 09:07 AM
Anguish for homeowners too :(

Windpomp
02-13-2012, 02:46 PM
For example, why would one buy a newish used house for, say, R120 when you could have it built for R100?

Not sure about this, have you seen building cost these days ?

mercurial
02-13-2012, 04:30 PM
They can b*tch and moan as much as they want, but it's the truth. If anything, it's not even 25%. More like 400%.

TonyA
02-14-2012, 12:00 PM
Technically houses may be overvalued, but if market demand is still paying these prices then how can you say they are overvalued. Demand drives the prices, and houses like overvalued cars are selling!

McT
02-14-2012, 06:15 PM
Personally I wouldn't like to see prices plunge. Perhaps a little softer. Thing is that many owners will use their homes as a part if their investment planning.

John
02-14-2012, 09:49 PM
Personally I wouldn't like to see prices plunge. Perhaps a little softer. Thing is that many owners will use their homes as a part if their investment planning.I think no-one wants to see house prices plunge, but the other side of the coin is that it is very difficult for new people to enter the property market. Salaries did not keep track with house prices, and something has got to give.

robt
02-17-2012, 12:29 PM
They can b*tch and moan as much as they want, but it's the truth. If anything, it's not even 25%. More like 400%.

Agreed! Especially with the high end market where you don't have many buyers.

robt
02-17-2012, 12:32 PM
Technically houses may be overvalued, but if market demand is still paying these prices then how can you say they are overvalued. Demand drives the prices, and houses like overvalued cars are selling!

But they aren't selling. I've seen houses in my area, and not 1 or 2 but like 10 or 15, on the market for 3 years. These places just aren't moving because they are overpriced.

There's demand in certain segments like the low end, first time buyer market, but move further up and the houses sit there for months if not years (with a stubborn seller).