Understanding the ENTIRE residential property market

It is a common habit to monitor the health of the property market from the perspective of our own homes.  Whether or not property prices are on the rise or falling, we understand these developments in relation to our own neighbourhood, how many FOR SALE signs are visible, the level of construction activity evident on the roadside, and so on.  In the early 2000’s when South Africa was going through a property boom that was celebrated internationally, even topping the scales of The Economist ratings, FinMark Trust commissioned research into the Township Residential Property Market that demonstrated this ‘boom’ was not widespread throughout the country, but limited to housing affordable to middle- and upper-income earners.  The research found that although South Africa was experiencing a property boom that saw the asset wealth of many rise dramatically, this was not the case for the one fifth of South African households who lived in former black townships.  The research concluded that because of a dysfunctional secondary market in those areas, households living in former black townships were unable to realise the value of their housing, worth (in 2004) an estimated R68,3 billion.

A posting by FNB’s Chief Economist, Cees Bruggemans, caught my eye this morning.  Describing the property market and joining a debate initiated by property economist Erwin Rode on the relationship between the price of new build and existing housing, he qualified:

“South African housing stock, meaning Western style housing usually larger than 80m2 but excluding low-income housing and houses in townships, are found to have many similarities with US housing.”

The article goes on to draw from US experience to understand the performance of South Africa’s property market, and then concludes that a relative over-supply of new housing coupled with depressed demand among over-indebted borrowers will undermine  growth in South Africa’s property market for some time.

But is he right?  By limiting the analysis to housing that is larger than 80m2 and excluding low-income housing and houses in the townships, Bruggemans is excluding the majority of residential property in South Africa.  Research done by the Affordable Land & Housing Data Centre has found that 58% of properties in South Africa are worth less than R500 000.  Annually, the state builds more houses for the subsidy-eligible population than any other sector of the residential construction sector, and after eight years, these houses are legally available for sale.  Our recent study into the asset value of this subsidised stock found that it comprises one quarter of all residential properties on the deeds registry.  On top of this, the affordable property market – housing that costs less than R500 000 and is generally smaller than 80m2 – is the fastest growing sector in the new build market, and only about 20% of all new residential construction in 2010 was worth more than R500 000.

This means two things.  First, it means that the action is exactly in the market that Bruggemans’ analysis excludes.  Developers have been shifting their attention for some time to the sub-R500 000, so-called “gap” market that is increasingly also the focus of the State’s attention.  It also means that over time, the profile of our property market is shifting dramatically in favour of lower value, still Western-style but smaller than 80m2 houses, targeted at the majority of the population.

Of course, for a range of reasons, the resale market among properties valued at less than R500 000 is very slow, and this is why it is often overlooked in property market analyses.  It is explicitly into this segment of the market – the majority of our residential property sector – that our initiative, the Affordable Land + Housing Data Centre is focusing its efforts.  Hopefully this will soon also attract the attention of property economists so that we all come to understand the ENTIRE residential property market when we conduct our analyses.