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Householders' Insurance
Tuesday, February 1, 2005
‘No bubble’

There’s little chance of the ‘bubble’ in house prices bursting any time soon, because there is no ‘bubble’. At least that’s Stanlib’ view. Its research shows that, despite first impressions, house prices have not been skyrocketing.
Year-on-year comparisons show that average house prices have been rising recently by more than 30% – apparent proof of a bubble in the residential property market. But when the timescale is stretched back 29 years, a different picture emerges, says Paul Hansen, Director, Retail Investing at Stanlib.
The accompanying graph reveals that, except for a brief period in the early 1980s, house prices consistently lagged the rate of inflation and therefore incomes, especially during the 13 years between 1985 and 1998. It was only in mid-2004 that house prices caught up with inflation and it was only in recent months that the increases in the asking price of a home moved ahead of prevailing inflation. Indeed, house prices had to rise to 23 times their mid-70s level just to catch up with inflation.
Observes Mr Hansen, “There have been concerns that we’re seeing a bubble in house prices and that the market could crash should interest rates rise significantly at some stage in the future.
“This has happened in the past in countries like the UK, trapping young families in homes they can no longer afford.” On the one hand they find that bond repayments have shot up, but on the other can’t afford to sell because they would make too big a loss after the collapse in the market.
“House prices in South Africa may come down at some stage as they are now edging higher than inflation. But on a 30-year view (1975 to 2004) there does not appear to be the potential for a huge collapse in values. Current prices appear to be at only a slight premium to fair value.”
One driver of the market is the impact of upwardly mobile black families. The proportion of black home ownership in affluent Midrand, for instance, is now 52%, says Mr Hansen.
  “Obviously, there would be grave concern among national planners if it looked like the first generation of post-liberation black families was massively exposed to a sizeable correction in the housing market.
“Thankfully, our figures suggest that the level of exposure is not as extensive as some had feared.” Stanlib believes that within 18 months to two years, our prime rate may even dip down to 10% or even lower, which is very positive for property and for the economy as a whole, and if anything may underpin further increases in house prices.

Copyright © Insurance Times and Investments® Vol:18.1 1st February, 2005
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