Absa Bank has just released their House Price Index (7 May 2007) and according to that the nominal growth for 2007 is expected to be about 13,1% (15,3% on average in 2006).
The growth in property prices has slowed considerably and is expected to continue into 2008. Jacques du Toit of ABSA expects the nominal rate to come down to about 9,7% on average for 2008. It means effectively that one can still have positive growth on an investment in property as the rate will still be above the expected inflation rate.
The more important factor is that they expect an average growth of 12,5 % per annum for the period 2007 - 2011. The implication is that property prices can grow at some stage at about 14 % to get to an average of 12,5%.
This bodes well for the person who buys wisely. The next 12 months will most likely be the bottom phase of the cycle. If one then purchases property at the right price during this period it will provide an excellent base for growth over the next few years.
For Example: Pete buys an apartment at R700 000 with transfer more or less December 2007. A year later his apartment will be worth more or less R770 000. Four years later it will be worth approximately R1 138 000! That is if it performs to the expected average escalation. Should the property be an above average investment, and it only performs a half percent per annum better, the return could well be about R1 155 000.
This positive growth will come on the back of lower interest rates, economic growth and an inflation rate that will be in check. Keep in mind that things can change and we do live in a turbulent world, but whatever one decides to do, it should always be based on an objective approach with a reality check every now and then.
One can also ask the question why not invest when the increase in property prices reach the 14 % growth level again? The answer to this is that one can certainly increase your returns by doing that, but the other side of the coin is that one can never be sure that the better property investment opportunities will be available at that specific point and at attractive prices.
It thus makes sense to immediately begin analyzing the opportunities as they appear, and to act on the solid opportunity when it comes around. Most people will get enthusiastic about property when the mood changes. And the mood will change when interest rates start to drop and when prices start to increase on growing expectations. The supply and demand factor will by then have shifted from the supply to the demand side, and it will be much more difficult to find the bargain priced property investment opportunities. Don’t let the psychological make up of the average person have it’s counter-productive way with you! We humans will on average get despondent when we feel the cold and will get wildly excited when the glow is good!
We should much rather take a bird’s eye view on things while they happen and follow the trajectory line as it assembles it’s future direction.
The investor who understands the cycle and who invests with right timing at the right place and at the right price will, time after time, walk away with the best returns. Timing wise, it means that the best point of entry should be during the next 12 months.
Happy hunting!
Wim van der Walt
8 May 2007
