Property prices drop 'more often than people think'

There are doubts about the accuracy of house price indices in reflecting changes in the values of residential properties, particularly in tough economic times.

John Loos, a household and property sector strategist, said yesterday that a view existed that property values were capable of largely holding up in tougher economic times, with some people believing home values could only rise.

"These claims or assumptions are often a little far fetched and stem in part from a misinterpretation of the most commonly used measures of home prices, namely house price indices.

"Home values fluctuate just like any other asset class would in response to changes in economic conditions," he stressed.

Loos said the average house price in South Africa had only fallen for one entire year in FNB house price index's 14-year history and only three entire years over the 49-year history of Absa's house price index.

However, Loos said house prices in real terms, after adjustment for inflation, had 24 entire years of decline.

"Downward corrections are more common than many believe," he said. Loos said the average house price level, as depicted by a house price index, was also not necessarily the "market equilibrium" price.

Not all the weakness in house prices was reflected in a decline in the average house price when residential demand slumped in 2008.

There was some decline in house prices but there was also a significant rise in the average time a house remained on the market before being sold, resulting in an oversupplied market with the market price remaining well above the "equilibrium price", which would be required to clear the market, he said.

Loos stressed a house price index was not a national home value index and any of the house price indices that existed were based on the value of home transactions.

He said there was a considerable bias in transaction value data towards the higher end of the residential market because people higher up the income ladder were more mobile and relocated more frequently.

This implied there was a disproportionately large number of sales in the higher priced segments relative to the number of units, he said.

"Conversely, towards the low end of the market, the frequency that homes get transacted declines. The most affordable segment of the residential market is the group of areas formerly labelled as 'black townships'.

"Here one finds a massive number of residential units but with relatively few transactions because the lowest income groups don't have the means to relocate frequently," he said.

Loos said this meant that in tough economic times, one could see a bigger slump in the volume of residential sales in more financially pressured areas and the number of financially pressured areas could increase during recessionary and stagnant economic periods.

"Such relative shifts in transaction volumes can see house price indices telling a better story than 'on the ground' reality," he said.

Loos said there was a risk of underestimating the extent of property value falls to come in a stagnating economy.

"A slowing house price index growth rate is unlikely to tell the full story of residential weakness should it occur because such an index only records what gets transacted and not what has 'exited' the residential market," he said.

Source: Business Report