TO V OR NOT TO V – THAT IS THE QUESTION

Hatched by Justin Clarke on Monday, April 12, 2010

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February was a bumper month for property prices as a result of increasing confidence in the economy.

According to the latest ABSA house price index, house prices lower range (sizes of between 80m²-140m²), the average value were UP by 9,6% (y/y), with an average value of around R725 200 in March. So quite simply, if you own a small house it is appreciating again at a rate faster than inflation, or if you want to think of it another way, the value is most likely going up by more than you are paying on your bond. Great if it is an investment property and you have a rental income as well, yielding probably in the range of 5% to 9%. That’s a combined gross return of 14.6% to 18,6%!

But the fact is buy to let investors have not yet piled into the market, even though there is lots of great value to be had.

If you are sitting on the fence then here is my view. Take a look at the graph below and there can be no doubt that growth is happening again. The question is where will it go.

The cycle operates in waves, with prices growing fast, then slowly, then fast again, and it has done since the beginning of time. The plotted line (see below) shows in a classic V shape since 2008 and we are moving up the side of the V. If you can time your purchase at the bottom of the V the higher your return will be.

But sometimes factors converge to cool growth, and the recovery falters and prices drop off again, forming a W shape.

I blogged earlier about fundamentals in our economy and the dangers of inflation, and I still have a firm view that this will cut our new up cycle short. The combination of inefficiencies in government, increased rates and taxes, stiff electricity price hikes, and food price hikes are the obvious local drivers of inflation are not going to be shoved under the carpet, but external factors are even more dangerous. It is a popular view that the rand is overvalued, and when this corrects we could face more rampant inflation, as the cost of imports increases especially Oil.

Inflation is a friend of those with highly geared and although using banks money will become expensive, but your borrowings will devalue, and your income will increase as salaries and wages correct.

But for the meantime the projections are good and the economy should continue to improve through the year, pushing property prices along with it.