Could take at least five years for the market to recover.The latest Rode Report on the state of the property market says house prices are overvalued by at least 25% and will take five years or more to recover.
Property economist and publisher of the report, Erwin Rode, has attributed this partly to “irrational exuberance”. The phrase was used by American economist and former chairman of the Federal Reserve, Alan Greenspan, during the Dot-com bubble of the 1990s. It has been interpreted as a warning that the market might be overvalued.
Rode explains that over the past ten to 20 years people became so enamoured with property as an investment that they lost sight of the fundamentals. “In the end they were paying and are still paying prices that are above replacement value having taken into account ageing.”
“Irrational exuberance, you had it on the stock exchange, you had it in all asset classes over the ten to 20 years. Then every now and then a correction takes place and the bubble must burst sooner or later. No-one can forecast when the bubble will burst.”
As far as office demand and vacancies are concerned, the report says moderating economic activity, a drop in business confidence is having a weakening effect on office rentals. However, office and industrial buildings are still well below the replacement value and are fundamentally good value.
It says in the third quarter of 2011, national market rentals grew only by 4%. “This comes after having achieved an unsustainable growth rate of about 11% in the first quarter,” Rode says.
The report states that building cost inflation (the cost to construct buildings as measured by the Building Cost Index), has accelerated dramatically rising to 14%. This is mainly due to contractors no longer being able to absorb rising input costs.
Demand for industrial space has shown poor to moderate growth in market rentals. In the 2011 Q4 the best performance was seen in Durban and central Gauteng followed by the Cape Peninsula and Port Elizabeth.
The report says prospects for industrials rentals remain weak as a result of the domestic economy struggling to find its feet amidst uncertain global economic prospects.
On the residential front flat rentals are still outperforming both houses and townhouses with a 2% year-on-year growth. Houses and townhouses have a 1% year-on-year growth. Rode says these rates are still well below the rate of consumer inflation which stood at 5% in the third quarter of 2011.