Diamonds in the rough, top performers

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19 Jun 2013

During the past 5 years global residential real estate prices have declined by over 10 percent (in US$ terms), with most major countries experiencing significant down side revaluations.

There was increased foreign buying, particularly in the luxury property market with much of this investment focused in the Cape Town region, but the increase in Cape Town valuations has impacted valuations in the rest of the country.

However, a few lucky countries have managed to record strong price growth over the same review period of 31 Dec 2007 to 31 Dec 2012. A few of them are highlighted below.

Israel

71 percent growth (LC terms)

74 percent growth (US$ terms)

Contributing factors

  • Israel’s economy performed well through the recent financial crisis and unlike most developed markets it managed to avoid a drop in GDP during 2008–2009.
  • Israel’s GDP per capita grew by 32 percent over the review period, from US$24.277 in 2007 to US$31.955 in 2012.

It should be noted that this strong growth followed a period of poor growth between 2000 and 2007, when Israeli residential prices fell by 2.3 percent while the rest of the world experienced a property boom. 

During the period from 2000 to 2012 as a whole, Israel’s residential market recorded price growth of 55 percent, which is more in line with the worldwide average over that period.

The strong 2007 to 2012 performance could therefore be seen as a correction to put Israel back on track with the rest of the world. Israel’s poor 2000–2007 performance came, of course, as the 2000 Intifada heavily impacted on economic growth and investor confidence.

Indonesia

21 percent growth (LC terms)

19 percent growth (US$ terms)

Contributing factors

  • Indonesia saw a rapid rise in millionaire wealth, which increased by over 100 percent during the review period, the highest growth rate of any major country in the world (according to WealthInsight).
  • Prices of prime residential property in Jakarta rose by an incredible 113 percent over this same period (in US$ terms, source: Knight Frank).
  • Consistently strong economic growth through the financial crisis − US dollar per capita GDP levels increased by 83 percent over the review period.
  • Declining local interest rates and increased mortgage lending over the period.
  • Starting from a low base with US dollar square metre prices in Indonesia being among the lowest in Asia. 

During the period from 2000 to 2012 as a whole, Israel’s residential market recorded price growth of 55 percent, which is more in line with the worldwide average over that period.

Australia

12 percent growth (LC terms)

28 percent growth (US$ terms) 

Contributing factors

  • Housing shortages in major cities.
  • Purchases of new-build homes by foreigners seeking to move to Australia.
  • Historically strict lending practices that reduced the risk of defaults (such as those that occurred in the US).
  • The government helped first-time buyers by temporarily doubling the first-time home owner grant to US$12.400 (AU$14.000) in 2008.
  • The government lifted rules in December, 2008, in order to allow temporary visa holders to buy pre-owned homes. These rules were re-introduced in April, 2010, after the risk of a crash had been averted.
  • The reserve bank reduced interest rates significantly in 2009, from 7.2 to 3.7 percent. Rates were then increased in 2010 and 2011 in order to curb house price increases and inflation.
  • The tendency of Australians to buy rather than rent, with a high 75 percent of Australians currently living in their own home.
  • Large proportions (60 percent) of home owners own their home outright, limiting the potential for defaults.
  • A significant 15 percent appreciated of the local currency against the US$ from 1.14/US$ at the end of 2007 to 0.96/US$ at the end of 2012. This impacted on US$ valuations only. 

How does this compare to South Africa?

South African residential property was a mixed bag. It recorded positive growth in local currency terms but negative growth in US$ terms.

South African residential prices are now down by almost 30 percent in US terms since the peak of the market (in 2007).

South Africa

16 percent growth (LC terms)

-7 percent growth (US$ terms) 

Positive factors

  • South Africa’s quickly growing middle class, which is seen to be the primary driver of the growth in local property prices.
  • South Africans who kept their money abroad were required to bring it back by September 2004 – much of this went into property.
  • Strict lending practices that reduced the risk of defaults (such as those that occurred in the US) and the country has traditionally high interest rates and high deposit requirements.
  • Increased foreign buyers, particularly in the luxury property market with much of this investment focused in the Cape Town region, but the increase in Cape Town valuations has impacted valuations in the rest of the country.
  • Investment associated with the 2010 FIFA World Cup. 

Negative factors

  • The recent slowdown in economic growth which has a number of causes including uncertainly caused by recent mine strikes and labour market disputes.
  • The Rand depreciated from 6.85/US$ at the end of 2007 to 8.45/US$ at the end of 2012. This impacted on US$ valuations only. 

So far this year

The Rand has since depreciated by another 18 percent, reaching over 10.00/US$ in June 2013. During this same period, local residential prices have not risen by much - in Rand terms they are up by only 2 percent in the first four months of 2013.

This means South African residential prices are now down by almost 30 percent in US terms since the peak of the market (in 2007). 

This should make them an attractive investment for overseas buyers over the next year. - Andrew Amoils

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