House price growth – is it fact or fiction?

Industry is using inappropriate statistics, says property economist and adviser

THE MAN in the street is not getting the full picture. He is being told by the banks, mortgage originators and estate agents that average home prices increased by between 5 percent and 6 percent last year, when in actual fact, they only increased by 0.94 percent.

This is according to Neville Berkowitz, whose title is property economist and adviser to low-commission estate agency, HomeBid.

Berkowitz says: “Even the South African Reserve Bank is using this incorrect information in its assessment of home price inflation which it estimates at the inflation rate of 5.2 percent last year, according to the December 2015 Reserve Bank Quarterly Bulletin.

“The discrepancy lies in the limited sample of sales and transfers used by these market commentators,” says Berkowitz.

“We, however, analyse every single home sold and transferred in all the deeds offices around the country: 289 613 last year and 290 257 the year before that. In 2014 the average price of a home transacted at the deeds offices around the country was R1.22 million and last year it was R1.23 million – an increase of only 0.94 percent. This is based on information supplied to us by the South African Property Transfer Guide, which we use to analyse market trends.”

He says that SA banks each only have a maximum 9 percent market share of the total sales and transfers due to 65.5 percent of homes being bond- free, according to research by Absa and Lightstone.

The banks’ samples on which they base their home price increases may not therefore be fully representative of the entire residential market.

“High- commission estate agencies each have less than 5 percent market share of all the homes sold and transferred last year on which to calculate their home price increases, so they obviously also lack the information based on all the 289 613 homes sold and transferred last year,” says Berkowitz.

“To illustrate, the largest number of homes transacted last year was in the lowest- price category of less than R250 000, where some 85 155 homes, or 29.4 percent of all homes were transacted.

“These homes, on average, dropped 6.7 percent in price in nominal terms, and were 11.9 percent down in real terms (after inflation), last year when compared to 2014. This was mainly due to the 0.5 percent increase in interest rates last year. The prospects for this price category this year are even bleaker as interest rates are expected to rise during the year by at least 1.5 percent.

“At the top end of the price category range are the R10 million-plus homes which saw the highest average price increase of only 2 percent a year. This is based on the average price of the 2 642 homes sold and transferred nationwide in this price category last year compared to 2014.

“What concerns me most about these 5 percent to 6 percent a year average home price increases used by market commentators, who may be using limited samples of homes sold and transferred, is that the average homeowner believes he has an inflation- proof investment rising at above the inflation rate,” says Berkowitz.

“Last year, however, the 0.94 percent average home price increase was, in fact, a real decline of 4.2 percent after adjusting for inflation, and well below the inflation rate of 5.2 percent for the year.”

Berkowitz believes the outlook for this year is worse, with a possible drop in nominal average home prices below zero and an inflation rate probably higher than the 3 percent to 6 percent range aimed at by the Reserve Bank. CPI is expected to be in the 7-10 percent range this year.

“If people knew that last year it would have been more profitable to rent a home and leave their money in the bank earning 6 percent a year than investing in a home at 1 percent growth, perhaps there would be fewer homes repossessed,” says Berkowitz.

“We need more transparency from commentators on home prices, especially highcommission estate agents and mortgage providers, as to where their information is derived from and how they calculate their estimates of average home price increases,” says Berkowitz.

Weekend Argus asked some of the high-commission estate agents and mortgage providers to comment on Berkowitz’s arguments.

To create some context around the transparency of the data that Absa’s property analyst Jacques du Toit ( Absa Home Loans) uses in the Housing Review and House Price Index, the bank says that the Absa House Price Indices, available back to 1966, are based on the total purchase price of homes in the 80m 400m2 size category, priced at R4.4 million or less this year (including improvements), in respect of which mortgage loan applications were received and approved by Absa.

Prices are seasonally adjusted and smoothed in an attempt to exclude the distort- ing effect of seasonal factors and outliers in the data. As a result, the most recent index values and price data may differ from previously published figures.

The information in both the Absa Housing Review and House Price Index is derived from sources which are regarded as accurate and reliable, is of a general nature only, does not constitute advice and may not be applicable to all circumstances.

“The source and calculation of our house price data and market segments we analyse, is based on our own definitions and this is clearly communicated in the review and index. The Index clearly states that it is a view based on the mortgage loan applications received and approved by Absa,” says du Toit.

Dr Andrew Golding, chief executive of the Pam Golding Property group says: “There are obviously many ways possible to statistically review the performance of the residential property market. The Pam Golding Residential Property Index is based on the globallyrespected repeat sales methodology incorporating residential property transactions registered at the Deeds Office as well as other data sources across the country’s residential property market, including PGP’s own sales data.

“An advantage of repeatsales methods is that they calculate changes in prices based on sales of the same property, thereby avoiding the problem of trying to account for price differences in homes with varying characteristics.”

Seeff chairman, Samuel Seeff, says that where industry statistics on house prices, growth and other figures are needed, Seeff draws on various highly credible sources that are respected by the industry and have been around for many years.

These include John Loos, property economist at FNB, Absa’s du Toit, mortgage originator ooba’s oobarometer – which includes a broad spectrum of banks and agencies and so provides a wider scope than perhaps FNB and Absa – as well as other data sources such as Lightstone and Propstats, which is limited to participating agency sales only.

“We would most certainly dismiss Berkowitz’s analysis, advice and assumptions as too simplistic and out of step with the industry and the market,” says Seeff.

Lew Geffen, chairman of Lew Geffen Sotheby’s International Realty, says renting property is pouring money down the drain with no return on investment.”

Francois Venter, director at Jawitz Properties, says it’s important to note that the data presented in Berkowitz’s article encompasses the whole of South Africa, including all metropolitan, coastal, leisure and rural areas. There are also very few homes in the main metropolitan areas that are priced under R250 000 – the price category which makes up the lion’s share of Berkowitz’s sample.

“In the metropolitan areas across SA, for the period reported, price growth has certainly been above inflation and real price growth has been achieved.,” says Venter.