Real high prices not al­ways a good thing

The property mar­ket in this coun­try is based nei­ther on broad lev­els of pros­per­ity nor solid eco­nomic growth

Weekend Argus (Saturday Edition) - - PROPERTY - JOHN LOOS

ARE HIGH and for­ever-ris­ing res­i­den­tial property prices really a good thing? Many seem to think so, but per­haps not if one con­sid­ers the broader eco­nomic ben­e­fits of af­ford­able property.

For those of us that pro­duce the coun­try’s var­i­ous house price in­dices, the gen­eral feel­ing is that the property in­dus­try, in­vest­ment pro­fes­sion­als, and in­deed much of the pub­lic, see it as a good thing when a house price in­dex shows strong growth – what­ever that may mean – whereas an “air of gloom” can be felt when we en­ter a pe­riod of low house price in­fla­tion or even de­fla­tion.

Un­der­stand­ably, lend­ing in­sti­tu­tions, and mort­gage bor­row­ers alike, don’t want to see home val­ues de­cline in nom­i­nal terms, be­cause it is that value which de­ter­mines the ease at which fi­nan­cially pres­sured home own­ers can trade out of their prop­er­ties and set­tle the en­tire debt. The nom­i­nal home value pro­vides se­cu­rity.

So, the best form of down- ward price cor­rec­tion, from a sys­temic risk point of view, if the eco­nomic fun­da­men­tals re­quire it, is one that hap­pens grad­u­ally in real terms, that is, you still get nom­i­nal house price in­crease, but at a rate be­low that of gen­eral in­fla­tion in the econ­omy or gen­eral in­fla­tion nor­mally mea­sured by the con­sumer price in­dex.

But, while sud­den down­ward house price move­ments are, we be­lieve, un­de­sir­able, that doesn’t mean that low house real price lev­els are a bad thing.

Cur­rently, real house price lev­els re­main not far off the all time recorded high achieved at the end of 2007, at lev­els that still dwarf any­thing seen in the few decades be­fore the start of the new mil­len­nium. They were driven to th­ese high lev­els by the largest res­i­den­tial boom on record, and al­though the home buy­ing frenzy of the pre2008 boom has long since abated, real house prices never cor­rected very far. Mas­sive global and lo­cal mon­e­tary and fis­cal pol­icy stim­u­lus largely saw to this.

But it has also been a sig­nif­i­cant res­i­den­tial sup­ply side con­straint since 2008 that has as­sisted the res­i­den­tial mar­ket to move back to a good bal­ance be­tween sup­ply and de­mand de­spite a me­diocre econ­omy,

For­mal hous­ing

haps not through choice, but pos­si­bly more due to the ca­pac­ity of the res­i­den­tial de­vel­op­ment, con­struc­tion and ma­te­ri­als sec­tor hav­ing shrunk fol­low­ing the hard re­ces­sion­ary knock of 2008/9, thus sus­tain­ing high costs of de­vel­op­ment.

Sup­ply con­straints may go fur­ther. Ur­ban land scarcity is in­creas­ingly be­com­ing an is­sue, when re­fer­ring to land with the nec­es­sary in­fra­struc­ture avail­abil­ity.

And so, sup­ply con­straints, and thus high costs of res­i­den­tial fixed in­vest­ment, ap­pear to be key in con­strain­ing the level of res­i­den­tial fixed in­vest­ment to 1.4 per­cent of gross do­mes­tic prod­uct, an even lower per­cent­age of GDP than the mul­ti­decade low of 1.5 per­cent reached in the first quar­ter of 2009, just af­ter that ex­treme 1998 in­ter­est rate shock. Not all of the blame can be laid at the foot of sup­ply-side con­straints. South Africa’s house­hold sav­ings rate is to­tally in­suf­fi­cient to fund a high level of res­i­den­tial fixed in­vest­ment.

Fan­tas­tic, many res­i­den­tial in­vestors and home own­ers would prob­a­bly say to them­selves. But, tak­ing a broader view, is it really that fan­tas­tic?

I would say, per­haps not. If SA’s econ­omy was grow­ing at 10 per­cent a year, was near­ing full em­ploy­ment lev­els, and home val­ues were sky high be­cause ev­ery­one was suf­fi­ciently re­sourced to af­ford a home, it would be a dif­fer­ent story. But in a weak growth econ­omy, with an ex­treme un­em­ploy­ment rate and ris­ing so­cial ten­sions and in­sta­bil­ity? That’s not the time to be ex­pe­ri­enc­ing rel­a­tively ex­pen­sive property val­ues more due to lim­ited sup­ply than due to strong res­i­den­tial de­mand.

There are far too many ad­van­tages of hav­ing the ma­jor­ity of house­holds, if not all, housed in for­mal homes, whether it be owned or rented for­mal homes. Much has been writ­ten about th­ese ad­van­tages. For­mal hous­ing nor­mally im­plies elec­tri­fi­ca­tion, wa­ter and san­i­ta­tion. It takes a so­ci­ety’s health lev­els up­wards, as well as its ed­u­ca­tion lev­els and gen­eral so­cial well-be­ing.

Those ad­van­tages are at the af­ford­able end of the mar­ket. Higher up the price lad­der, the po­ten­tial ad­van­tages of rel­a­tively af­ford­able property are nu­mer­ous too, most no­tably in at­tract­ing skills to a re­gion or area, skills that are es­sen­tial to give that re­gion a com­pet­i­tive ad­van­tage, thereby boost­ing its eco­nomic per­for­mance.

So it was not sur­pris­ing re­cently to see re­ports of PWC’s 2015 Good Growth for Cities In­dex, rank­ing UK cities in terms of eco­nomic per­for­mance and qual­ity of life, rank­ing Lon­don as one of the low­est. One rea­son that stands out was a lack of af­ford­able hous­ing.

Where high home prices can im­pact neg­a­tively is in the area of the lower paid pro­fes­sions, such as teach­ing, nurs­ing or mem­bers of es­sen­tial ser­vices such as the po­lice force. Th­ese ac­tiv­i­ties are cru­cial in giv­ing a re­gion or area its com­pet­i­tive ad­van­tage, be­cause they in­flu­ence the qual­ity of ed­u­ca­tion or health care.

So let’s con­sider a town such as Stel­len­bosch, a ma­jor univer­sity town and with a sig­nif­i­cant school-go­ing pop­u­la­tion too. But it is also a town whose life­style has at­tracted much wealth in­flow, and whose property val­ues are high by SA stan­dards. Can the town’s large con­tin­gent of ed­u­ca­tional staff af­ford property in the town? Or does this start to be­come a con­straint that can chal­lenge aca­demic stan­dards over time be­cause some teach­ers and lec­tur­ers be­lieve they can be fi­nan­cially bet­ter off work­ing and liv­ing in cheaper towns or re­gions? Will Bloem­fontein and Nel­son Man­dela Bay ul­ti­mately have bet­ter ed­u­ca­tion than Johannesburg in part due to a cheaper life­style in those cities, a life­style in­flu­enced by home val­ues?

When one con­sid­ers th­ese po­ten­tially neg­a­tive im­pacts of a lack of af­ford­able property in a re­gion, which can even­tu­ally pos­si­bly con­strain its eco­nomic growth, then it be­comes less clear that high real home val­ues are all a good thing.

This cer­tainly is not to ar­gue in favour of some sort of price con­trol. Sup­ply and de­mand forces should al­ways de­ter­mine the price. But some­how bring­ing about a greater sup­ply ca­pa­bil­ity, which leads to con­sid­er­ably lower real home val­ues, and sig­nif­i­cantly greater por­tion of the pop­u­la­tion be­ing housed in for­mal hous­ing? Greater skills mo­bil­ity due to less in­af­ford­able re­gions, es­pe­cially for lower paid but cru­cial pro­fes­sion­als?

That seems to be a more de­sir­able sit­u­a­tion from an eco­nomic per­for­mance point of view. SA’s cities are ex­pe­ri­enc­ing steady ur­ban­i­sa­tion pres­sures on land avail­abil­ity. The key chal­lenge is a com­bi­na­tion of making more land avail­able as well as util­is­ing ex­ist­ing land bet­ter through clever den­si­fi­ca­tion, to make hous­ing more af­ford­able, as well as to make good pub­lic trans­port more ac­ces­si­ble and vi­able. Should that hap­pen, it would be a key ben­e­fit to city economies, even if it were to hy­po­thet­i­cally mean that our house price in­dices de­cline in real terms as a re­sult.

Up and up and up in real home val­ues is not all good.

● John Loos is the house­hold and property sec­tor strate­gist at FNB Home Loans.

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