Friday, January 6, 2012

SA Property Market - Your house now buys much less coffee, gold and oil

A friend asked me earlier this week what I thought about the property market in South Africa. 

Indeed, that is a complicated question.  After scanning a number of articles online, it seems like the prevailing expectations for SA's property market is that it will keep going up. 

One website I looked at expects a compounded growth rate of 11.25% until 2050 for our property market.  

If that is correct, the price of the average home in SA should grow with R 112,500.00 each year for the foreseeable future (assuming the average home cost R 1 million ZAR and excluding the complexities of compounded growth averages). 

So, it seems to me like many if not most people expect house prices to keep going up. Some may expect some weakness, but overall the expectation is that property prices never go down.  

Consider the following chart I have compiled from nominal house price data on the average south African home, obtained from

Looking at the chart, it is not hard to see why most people expect house prices to keep going up, staggering growth is evident. 
Click to expand
A common reason suggested for continued growth is that South African property was traditionally under priced when compared to the rest of the world. It sounds logical, that being the case, prices should keep going up until some form of fair value is reached, economics 101! 

Talking about fair value. I think it is important to realize that even if things go up in price, it doesn't necessarily mean they are going up in value.  To illustrate my point, I took the average house prices above and divided them with historic commodity prices since 1995 (commodity prices were obtained from 

This tells a different story. It appears that if you were to trade your house for cash, and convert that cash, into commodities, you'll actually be losing a lot of value.  

Consider maize for example: 

In 2005 the average house was worth 1081 tons of maize. Today it is worth only 510 tons of maize.   

Soybeans: in 2005 the average south African house was worth 513 tons of soybean; today it is worth only 326 tons.

Robusta Coffee: in 2005 the average home was worth 258492 pounds of coffee. Now, at the end of 2011 it is worth only 129385 pounds of coffee.  So compared to past value, your house is worth much less in cappuccino today! 

Crude oil suggests a similar story. Trading your house for crude oil? Bad idea, in 2004 you would have received 2366 barrels of crude oil for the average South African home, today priced in oil, you'll only get about 1489 barrels of crude for the same house.   

What story does gold tell us? The trend appears to be similar. In 2005 you could purchase 248 oz gold with the average home.  Today, the average home will buy only about 86 oz of gold.  

If I am reading the info correctly (correct me if I am wrong); in value, the high point for the South African property market occurred in 2005. 

Now rising house prices do not necessarily lead to increased value (it probably reflects only US and European monopoly money circling the globe).  

Assume you bought the average house in 2000 for R 310,686-00 cash, and held it until 2005. In 2005, based on the data, the house would have been worth about R 704,353-00 in nominal terms. Let's say you sold the house in 2005 and switched to gold.  In 2005 you could have purchased 248 oz's of gold with the average house.  

If you held 248 oz's of gold since 2005 of gold and sold at today's market price, you could have sold your gold for R 3,290,454.08. 

So, by staying in the property market, has the average property investor lost the opportunity to make and additional R 2 million rand since 2005 on the average house, by not switching to commodity investments?     

Why will house prices keep going up? 

Much credit to the economist Peter Schiff for bringing this basic question to my attention.  The questions that Schiff has for people assuming that house prices will always go up are:  

1) Why should people buy when they can rent more cheaply? And, 2) which fundamentals are going to drive house prices higher?  

Also what is the premium on ownership worth? Is it the premium on ownership that will drive up house prices? If so, was the premium on ownership really worth more than the lost opportunity to pocket and additional R 2 million on the average SA house since 2005? 

The Cash Flow Argument

Yes, but what about cash flow? Gold does not pay you rent does it, you may wondering? True, I agree wholeheartedly that properties with good cash flow are some of the best investments out there. 

Yes, but most residential property investors I know do not own cash flow positive properties. Look at our family home as an example. 

Our house was last valued at R 1,250,000.00 million. Let's say I win the lotto and purchase the house cash. I'll then only be able to rent it out for about half its bond repayment value, say about R 6000-00 to R 7000.00 (not sure, I am assuming here).  

So, conservatively my annual rental income yield is only 5.76% (R 6000 x 12 = R 72 0000/R1,250,000 = 0.0576). Assuming, of course, that nothing on the property breaks and I don't have to pay taxes, rates, etc. 

Since, I cannot buy a home cash at this point I'll have to mortgage the home. I'll then have to pay a deposit of 10- 20 % and my bond will cost me about R 11,500.00 per month (roughly estimated at 1% of purchase price). With rental of R 5000, R 6000 or even R 9000, it does not really produce cash flow positive investment, does it? 

So all I can hope for is capital gains and hoping for capital gains is not the best strategy.   

Let's take an even more preposterous position, let's say I am a ga-zillionaire able to buy each and every house in SA at average prices. Since I cannot stay in each and every house I bought, I'll have to rent them out. 

Then, I'll still only get in order of 5.67% rental income from my investment (excluding all the added costs associated with ownership). How many ga-zillionaire investors will settle for a return of 5.67% or less? That does not even beat CPIX inflation.  

So, for prices to go up in the residential property market, sellers would have to find buyers who'll pay even more for a negative cash flow asset. Maybe I am missing something, but that's just crazy.  

So, now I ask again, why should the prices keep going up? That charts above show us that houses are actually falling in value when measured in gold and other commodities. 

My concern is that the masses in the South African (and global property) market are going to start to question the current premium paid for home ownership, which appears to be very very high, when measured in lost opportunity.  

Mortgage Lending Graph

Another concern I have is that mortgage lending growth has slowed ... a lot! Check out the following graph taken from the Exceed Group's market report September 2011.

Assuming that the graph above is correct, mortgage lending growth has contracted to levels below those in 2000! Doesn't that suggest that the supply of money to buy houses at the current prices is severely restricted?  If so, shouldn't house prices be coming down, instead of going up? 

Sellers may be trying to sell at legacy prices, they were used to in 2005 - 2006, but are those prices realistic? 

It seems to me like the free market does have a solution for restoring to property/rent income yield; 1) by raising rents, or 2) through falling property prices.

A drastic drop in commodity prices should restore value. 

If rent increases are often controlled by contracts, and if all the quantitative easing money printed since 2008 continue to drive up commodities, then why should we expect property prices to keep going up?        

To tell you the truth, I won't be entering the property market just yet. Seems to me that there is very little true upward price pressure, and much more downward pressure.  Assuming that prices will always go up is a highly dangerous position often found near the top of a bubble.

The SA Property market may have been undervalued, but it is also very possible that the global property markets were overvalued. If that is the case, we might be screwed!

Thanks for reading. Please share your insights below.


I am not a professional financial adviser. Information presented is intended to be solely conversational and educational, please don't make investment decisions based on just one source, do your own research, and consult a registered financial adviser.

While I tried my best to present accurate information and numbers in this posting, I cannot guarantee the accuracy of any information presented.    

Posted by Gerhard van Onselen (follow me on Linked In and Twitter)


  1. See the following Business Day article.

    SA property prices 25% ‘overvalued’- South African house prices are cheaper than ever — and have some way to fall, says report by property economist THABANG MOKOPANELE

  2. Thank you for the well written and informative post.

  3. This just goes to show how bad a measure of value the ZAR is, like all other currencies.
    Expect most commodities to drop in price based on economic slow down from china, europe et al except food and remember gold is not a normal commodity.
    House building costs in SA are high due to high labour costs using unproductive labour using out dated labour intensive building methods partly due to out dated deemed to satisfy building codes.
    Energy efficiency requirements and high energy costs are going to be another thorn in the flesh in existing house prices. In 10 years time who will want to own or live in a house not meeting SANS 204? The utility bill will be the biggest demotivater, renovating a brick structure not to leak energy like a sieve will be uneconomic.


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