HOW CAN I TELL WHEN IS THE TIME TO BUY?
Hatched by Justin Clarke on Monday, May 10, 2010
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We know that when property prices bubble it’s not good.
A bubble, defined as a “trade in products or assets with inflated values” is really hard to predict and as most of you experienced over the last 2 years, is only evident when prices of houses deflate fast and we realise that the air escapes between the traded price of the house and the real price that a willing buyer will pay for it when the air of speculation escapes and value finds a new base.
It would be really cool to have an indicator that jumps up and punches us in the nose when we want to buy a property at a time when spin is driving up house prices, not fundamentals, but as history proves it would have to knock us out to keep us sensible. Investors follow the crowd, and when prices move strongly, investors dive in.
A wise economist once professed ( I believe it was Erwin Rode) that when the price of a new house is the same or less than a second-hand home a bubble exits. This makes sense to me as clearly second hand houses are older and should be trading below what a new modern house would trade for, but if demand is so high that demand is driving up prices to beyond replacement cost, then supply of new houses should saturate the market bringing prices down and deflating the bubble. Does this ring a bell? Developers are still sitting on surplus stock that they have been unable to sell at launch prices, and very few are building.
But what I really want is a sign… to know is when is a great time to buy?
Surely the opposite applies, and when developers stop building because the large differential between new and second-hand homes exits, we have a buy signal? Take a look at the graph below, taken from the FNB Market Analytics:
Note how from 2004 the bubble started to develop as replacement cost relative to value dropped till it cost the same to build new than to buy second-hand. And we know what happened to property prices at the end of 2007 till 2009!
So put simply, the cost of replacing your home is becoming far more than your home is worth, showing surely that there is fundamental value in the property and at some stage the value will be pulled in line with the replacement cost or developers will not go back to work and a shortage of houses will come about, driving prices up again.
If you are interested in this topic or are interested in property investment, come meet and listen to myself and 7 property opinion leaders, book now to attend the PROPERTY WEALTH NETWORK function at a venue near you.
Categories: Property Investment, Property News
Comments (11)
thanks Justin, makes for interesting reading. Would you mind writing something along those lines for my May newsletter, I will obviously quote you and refer to PPL.
Regards
Karien Hunter
With pleasure Karien just give me a deadline!
Are you attending the PWN functions?
Thank you Justin, What about Commercial and Industrial Property? Peet
Same principle applies Peet, but really the subject of another article – remember that commercial property is valued based on yield – so an empty building has a very low value relative to its replacement cost…
Always a great time to buy when the price is right and you do get that out there. But on average we still have a way to go. Looking at the graph, above 30% makes sense to me. Prices still need and will come down with forced sales stats driving down market values perhaps 30%.
Where does the loaning issue come into the equation? I believe that the willingness of investors and buyers alike is gaining strength, but ability to buy is hindered by the lack credit given to individual residential buyers. Feeling the real punch of the current credit belt squeeze is the buy to sell investor and the unfortunate individual who bought over the last three years, and have see their house values plummet.
A good time to buy is watching the ability of other buyers. With ready money, the market is open to negotiable pricing and you could catch a few bargins, while most sit around with empty wallets or heavy breathing bankers in the wings. Just be prepared to hang onto your investments for a while. Love the input Justin, Thanks.
Great pleasure Karen, sorry you got the timing wrong, but if you can hold, then all will turn out well in the long term. Remember Residential Property has outperformed most other asset classes over the last 5, 15, 20 year periods!
HI Justin.
Very good article which makes a lot of sense. My personal view is that it is a good time to buy at the moment. Banks have started to ease their lending policies and interest rates seem to be stable, property prices have shown early signs of recovery and developers are sitting with their last bits of surplus stock.
Just a suggestion, a line graph on top of the replacement cost gap bar graph showing the growth in property prices would add a lot more value to the viewer.
Thanks Daryl, FNB Property Market Review had a graph plotting value against replacement cost Ii believe, ill take another look at it. If I asked you for 5 buy signals (residential Property) what would you list?
Hi Justin,
I am not sure. As stated above those were the signals I was looking at. I would therefore have to say my five are:
1) Consumer confidence, 2) stable low interest rate environment, 3) % of bank loans granted compared to an appropriate benchmark, 4) number of new developments supplied into the market (looking for the beginning of an increasing trend), and 5) Average days taken for properties to be sold (looking for the beginning of when this number starts declining).
A list of your five would be appreciated.
Hi Justin,
I agree. It is a good time to buy (probably not getting better). Alone the low interest rate environment, the positive effect of the NCA, lack of new stock supplied to the market, and new market entrants.
Good article.
Mike
Now here’s the big question – i owe 250,00 on my townhouse in dowerglen. My repayments are 5,000pm
+levy 1600 and rates 350 pm. I can get Rl,350 for my
property. Do I sell and buy something smaller and pay
cash for it or do I invest the money and rent somewhere
Marianne, I think you would be crazy to sell and rent…
Your repayment seems high – R250 000 over 15 years is R2650.00 per month at prime. You must renegotiate this with your bank.
Where will you rent a decent place for less than R4500, and where are you going to put your money that is safe that will give you a better return?
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Very good article which makes a lot of sense. My personal view is that it is a good time to buy at the moment.
Real Estate Sale
williamsjohn333
The graph above is it for property investors or private buyer?
I would like to have some explanation for the term you use:- 1. What is the replacement cost? 2. Valuation for existing cost
Can someone just give a clear definition of the two
Thanks
Mack
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