Reasons not to fear bumpy property ride

Residential property prices have hit a wobbly; here’s why you shouldn’t panic.
By: Jackie Cameron

Residential property prices have hit a speed wobble, latest figures show. But don’t let that put you off buying, or holding on to, bricks-and-mortar.

According to Standard Bank’s latest figures, the median house price fell back to R585 000 in July, down from R620 000 in June – a drop not far off 6%.The figure for May was R600 000.

Property bears were pleased that prices finally seem to be dropping, rather than merely ticking upwards more sedately than two to three years ago, because this serves as confirmation they may have been right. South African residential property, they have been arguing, has been in bubble terrain and set to burst.

Strange how a price hiccup can leave some people thinking a whole asset class is about to collapse – especially when you look at others, like shares, that bob up and down every day and even plummet quite dramatically from time to time.

Equity investors are not encouraged to run for the hills. In fact, quite the opposite: “Hold tight for better times because your loss is just a loss on paper”, is the clarion call. Some market commentators argue, too, that a decline represents a buying opportunity because prices will go up again.

The same is the case, I’d argue, when it comes to property. Unless you are a speculator or are forced to sell in a hurry, you have nothing to fear.

Property is not suited as a short-haul acquisition. Here’s why: There are costs associated with transferring property, like duties, legal fees and agents’ commission. You need time for your property value to overtake what you paid for it and then start generating a profit.

You shouldn’t be alarmed when prices slow or even take a knock.

You should do what sensible equity investors do: Sit back and wait for better times if you want to sell, or scout around for fresh opportunities.

Provided you bought wisely and taking into account your overall longer-term financial objectives and situation, property should not let you down.

And, if your primary goal is home ownership, you should keep that target in your sights by steadily repaying the loan in order to eventually wipe out a significant monthly overhead.

Let’s go back in history. Just as shares have helped boost people’s savings beyond what they could have earned in an interest-bearing bank account, so too has residential property soared in value.
Absa figures supplied to Moneyweb show that in 1965, the average cost of a house was R9 500. A decade later, the average house carried a price tag of just over R23 000.

By 1985, the average cost of a house was R73 000 and by 1995 this figure had mushroomed to about R172 000. Only two years ago, the average house cost about R575 000 – and now it’s knocking on the door of R1m.

This is how compound growth works: it is exponential.

In between these snapshot years, prices grew faster at some times than at others and occasionally they even declined. But the drops don’t change the fact that in the long-run prices have gone up considerably in the last 40 or so years.

There will inevitably be some duds, like a property in an area that deteriorates rather than regenerates. But that goes for shares too.

If you want to own your own home, don’t delay in buying. The money you hope to save through buying a bargain on the chance that prices will slump further will probably pale in comparison to the overall price growth you can expect in the long-run.

Article from MoneyWeb