Is property inflated

[Doug B]

As an experienced Real Estate Agent, whose personal opinion that the incredible growth experienced a few years back has resulted in an over inflated market. Many reports quote figures like 3% which I find hard to believe, considering that some properties that 7 years ago have now increased something like 5X over. I would be interested to note the forum's opinion on whether or not property is over priced and if so, by what %? Your feedback would be much appreciated.

[AndyD]

I think the acid test of property prices is comparing them to what the build cost would be. They may have increased in value by a factor of 5 in the last so many years but if the build cost has increased by the same margin then they wouldn't be overpriced.

Many houses in the present market are priced at less than the cost of the plot + build cost so they would actually be underpriced.

[Doug B]

That's a good point Andy, what worries me is the discrepancy between rentals vs bond repayments. Even with the low interest rates we have the difference is huge and this seems to indicate an imbalance in the market. Investment properties are a waste of time, you may as well put your money in the bank. How this imbalance is readdressed is going to be interesting to see. From my own point of view I see too many commercial TO LET boards around for my liking. Sellers thinking they can get R10 000/m2 for their buildings are generally dreaming and yet this was the level +/- where the bubble burst so there may be some tough times ahead for investors really battling to find tenants that will bring in any rental close to the bond repayments. That's at the commercial level and the residential sector is not much better. Many people invested in cheap bachelor/1 bedroom flats and with the levies and rates payable find themselves having to subsidise their bonds. Some people bought as many as 10 flats when credit was easily available and now find themselves in deep financial trouble. Solution? Not sure.

[AndyD]

You're looking at property with a narrow perspective.

Investment properties are a waste of time, you may as well put your money in the bank.

True but also not true. Investment properties always were and will be a money laundering venture for a businessman with undeclared cash income. It's nearly impossible to track repairs and upgrades to a house so you spend your undeclared cash on improvements and a few years later you sell at a much higher price and voila, money laundered. Obviously the recent capital gains tax helps the taxman to at least get a cut.

I believe this tactic at least in part was reponsible for the glut of rental properties and hence the low rental incomes they're bringing.

I think the commercial side is more likely to find it's own level because of genuine market forces in this economic climate. Landlords will sooner or later just align prices according to the number of unoccupied premises they sit with.

[Dave A]

I think the acid test of property prices is comparing them to what the build cost would be. They may have increased in value by a factor of 5 in the last so many years but if the build cost has increased by the same margin then they wouldn't be overpriced.

I'm not convinced the build cost is a reliable indicator of fair price, particularly after what has happened in the last 10 years.

If we look at the period 2003-2007/8:

The cost of some building materials increased at a much faster rate than inflation, but the conditions under which this happened were not exactly "normal."

The cement industry became monopolised.
The price of cement also affects the price of bricks and tiles.
The government was on a spending spree of note, dramatically increasing demand for building materials, which rapidly outstripped supply.
The market was awash with credit, and we had a dramatic increase of new entrants to property ownership.
Perfect conditions for a pricing bubble.

If we look at current conditions... well government spend continues, but arguably not quite at the same rate.
But conditions in the private sector are certainly far more subdued.

Have prices truly adjusted accordingly?

[Doug B]

To AndyD.This cannot be said for all people who invested in residential property. With the growth rates as they were, property investment was very attractive indeed - tenant the property, cover the bond and levy with your rental and in a couple of years, sell it making a fat profit. To look at it purely from a money laundering point of view is narrow minded. There were alot of people who were successful in these ventures.

[Doug B]

To Dave A. There is no doubt in my mind prices have not adjusted accordingly Damn! Makes my life real difficult haha.

[AndyD]

I'm not convinced the build cost is a reliable indicator of fair price, particularly after what has happened in the last 10 years.....

Agreed but there has to be a relationship between build-cost and sale price, whether it's a fair one is very debatable. Labour costs on a new build have also escalated over the past few years in a fashion that doesn't necessesarily mirror inflation.

To look at it purely from a money laundering point of view is narrow minded. There were alot of people who were successful in these ventures.

I was only suggesting that the laundering angle was a factor in the market that would possibly skew prices... and possibly still is. It's a complicated market and to be honest I'm not particularly familiar with it on any kind of technical level. I certainly don't envy you having a business operating in this sector at the moment

[Doug B]

To Andy D, Yea it sure is a tricky market - the old adage still applies,"List hard,sell easy" , correct pricing of a property today is vital,price too high and the home will sit on the market for a couple of years. Problems arise when people bought at the zenith,credit was easy,got themselves over extended then try to make money out of profits from the sale of the home which in the present market situation may well not be worth what they originally paid for it, a right real stuff up ! I'm happy to say that our sales are pretty steady but realtors really have to know their business.Fortunately interest rates are low or else there would be total chaos. And BTW your point on money laundering certainly has validity,especially if the owner is doing alterations and is paying the builder weekly in hard cash.
uuum....I did not say that !

[wynn]

Supply and demand, willing seller and willing buyer are what decides the price of property.
If you have a glut of properties for sale that were bought to rent during boom times and are now difficult to sell, the demand of buyers and preparedness of sellers to sell will meet at the going market price.

Having said that, however, people need a roof over their head and the market with the most demand is social type housing under R700,000.oo maybe lower.
The high end will wait for prices to catch up (20 years who cares)

The poor individual who is in a financial squeeze and can't wait, has to sell, he will loose his shirt, he will probably have to sell for less than he bought at, just to wiggle out from under the debt burden.
He will be the same guy to buy at the top of the next boom and loose his shirt again!

Moral of the story, ADAPT, if you own a R1,2 million property and need to sell, first split the dwelling into two and sell both halves for R700,000.00

[Doug B]

To wynn

So what you are saying is that this is not really a win win situation Yea, but remember the banks knew the National Credit Act was on the way and were literally throwing money at people at reasonable interest rates. The property market was going so crazy with prices rising so quickly that banks found additional equity in properties just two years previously they would not have dreamed of. Many people call them silly, gullible whatever, took out second bonds, banking on what the market seemed to indicate their property was worth. The bank valuators don't even work for the banks so everybody was having a great ride until...CRASH! Lehman Brothers started the slide and we know the rest. Point is, the property may have got itself over valued by the granting of the second bond...however wynn or lose, lol your point is certainly valid.

[Doug B]

And another point to ponder is the effect an overvalued property has on the ammounts of rates you pay.In Durban for instance your rates are based on the MUNICIPAL valuation which often is a crock! The formula as I mentioned in another thread is the municipal value x 0.009 divided by 12 to give your monthly rates-an over valued property will result in higher rates;see my other topic where this is explained more clearly,fortunately there is still relief for buyers (and sellers-a home with a hefty rates bill makes it harder to sell) so as long as buyer and seller agree the municipal valuatuion is nonsense application for relief can be made by accompanying the sale agreement with the other required documents.

[Phil Cooper]

I have 4 investment properties - all are getting rentals in excess of bond repayments plus rates and levies, etc.

Had to carry most for 4 -5 years, but now they are ahead.

[Doug B]

Congratulations,that is no mean feet and must have required some solid financial discipline. Our list of 'Distressed' properties given out by the major banks continues to grow. Quite frankly quite a lot of people showed no restraint when credit was flowing like a river and hopped from bank to bank in order to buy up as many investment properties as they could,when we hit the wall catastrophe followed so you are in a good,solid position. You can bet there are many,many people who envy your position.The present market remains one extremely difficult to read so caution remains the order of the day.

[wynn]

I think the acid test of property prices is comparing them to what the build cost would be. They may have increased in value by a factor of 5 in the last so many years but if the build cost has increased by the same margin then they wouldn't be overpriced.
Provided there are vacant plots to build on in the area, most areas close to schools, shops, beach, view etc. are already saturated and prices are a lot higher than building the exact same property on the outskirts of town.
Many houses in the present market are priced at less than the cost of the plot + build cost so they would actually be underpriced.
This is a result of a glut of the particular type of property on the market at the time, prime real estate close to schools, shops etc, will not vary much during a bust but will definitely increase during a boom.

I still believe property is like rungs on a ladder, you may swap ladders but the rungs are proportionately at the same height.

If the ladder you are on happens to be going down instead of up, when you swap to a ladder that is stationary or going up, the rung on the new ladder will be lower and vice versa.