South African Homeowner's Point of View

7 Year Boom Reaches End

An article in Business Day has called an end to the seven year boom in the property market, saying that homeowners can literally wave goodbye. The main focus at the JSE on Monday involved property investment, particularly in light of the fact that most of us are paying more to hold onto these assets while their value continues to drop.

Our homes are the primary assets that many of us hold and they are also mostly mortgaged. When the Private Investor’s portfolio fell by yet another percentage point, there was some solace for those not having shares in the property and banking sectors.

Investors are generally averse to backing banks because of their cyclical earnings growth. In fairness to the banks though, investors are probably overly sensitive to the local earnings banking cycle, as a large part of banks’ profits are gained from services other than lending.

The non-lending services provide banks with a cushion when bad debts are increasing and when lending, particularly on residential properties, is decreasing. Our prejudice is reinforced by a certain resentment towards banks for charging us to lend them money and their often poor service.

When it comes to property however, there is literally no prejudice, as our homes not only provide us with a comfortable place to live, but are generally sound investments. The author of the article in Business Day, Ben Temkin uses his own experience in the property market as an example.

Temkin bought his present home a little over seven years ago, when the stagnation of the residential property cycle was coming to an end. After improvements, the cost just about broke even on the property they sold. The one purchased was at a fair price, which left plenty of room for capital gain.

By the middle of 2001, there was no doubt that the property boom was coming and Temkin responded by making substantial improvements to the property, before the cost of building began to escalate. Compared to his other investments, the weight on property was certainly on the high side.

If he had had excess liquidity, Temkin said that he would definitely have moved into the property sector on the JSE. There were at least 5 of the 7 boom years left in prospect for rapid earnings growth. Greedy investment over that period pushed share prices to overvalued levels. Temkin did not have excess liquidity and was comfortable to hold onto his investments and not trade any for property shares.

During the period May 2001 to May 2007, the JSE real estate sector increased from 300 to 900, which showed an average annual compound growth of 20%. By September last year, the index was around 860 and was already in a downtrend due to share prices that had overrun earnings growth. The historic price earnings ratio in 2001 was about 12 and in 2007, it was about 30. At a more cooled off index of 620, the historic price earnings ratio of 16 still looks uncomfortably high.

The information in this article is courtesy of Ben Temkin (“South Africa: Homeowners Can Say Goodbye to Seven Boom Years”, Business Day, 9 July 2008).

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