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Apr 03, 2006:
This week FNB Commercial Banking’s new economist John Loos caused a stir among property market watchers.
After predicting returns of more than 80% in the residential market in the next five years – which amounts to not far off a doubling of prices by the next decade – the bears wanted to box him.
The message from many Moneyweb readers was that keeping a lid on property prices will be a general lack of affordability.
“What happens when interest rates start to rise later this year? The man in the street is already battling to afford the current house price levels,” asked one reader.
But Loos is not alone in his assessment that, if you think property prices look high now, “you ain’t seen nothin’ yet”.
Joining him in his view that residential property will produce a return of roughly 10% a year over the next five years is Jacques du Toit, senior economist at Absa and Loos’ former colleague.
Du Toit expects to see average returns of between 10% and 15%, which is lower than the 20% and more we have come to expect through price surges in recent years – but very respectable when you consider inflation is well below 10%. This means, your money should grow in real terms.
Interest rates are believed to have moved into a structurally lower band and economic growth is set to fuel the property market, they say.
How risky is property? Many accuse economists like Du Toit and Loos of “talking their book”. The more they encourage people to buy property, the better it is for the banks they represent.
But bear in mind that there aren’t too many experts on residential property – which is why it is so often left out of asset allocation discussions by so-called financial experts. And why few people saw the last residential boom coming.
Absa-trained economists are probably among the few who have real insight into the inner workings of this asset class.
One of the exceptions is Rode & Associates, where property economists are less optimistic about the short-term prognosis for property – precisely because high prices are putting bricks-and-mortar so far out of the reach of many.
Says Garth Johnson: “We expect house prices on average to grow between 5 and 10% in 2006 and then over the next three to four years there should still be single digit annual growth. The major constraint is affordability.”
Over the long-term, property prices should track building-cost inflation, he says.
On the other hand, economists like Loos and Du Toit will tell you that, while we are taking on more debt as consumers, we are coping with it well. Lower interest rates mean we can afford bigger loans.
Like Loos and Du Toit, Johnson believes there may be better returns in commercial property than residential property over the next five years. You can access this directly, or through the listed property sector.
“The industrial property cycle has already entered the upswing stage,” he notes.
The popularity of property For many people, however, there are obvious attractions to residential property over other asset classes – regardless of whether returns are expected to be more sedate in the second part of the decade than the first.
Du Toit highlights some of the reasons residential property remains popular with many individual investors:
You can see it:
It is easier to understand than other asset classes;
It is less volatile than, say, equities;
Individuals are fed up with disappointing returns from savings’ products plied by financial services companies;
It is easier to control than other investment products. If, for example, you no longer like an area you can sell;
In the long-run, property preserves the value of capital and grows it at least in line with inflation;
Property can produce a steady income stream; and
Perhaps best of all, you can get other people to help you build a sizeable nest-egg as your tenants can pay off a large, appreciating asset if you are buying with the help of debt.
Like all asset classes, there are risks and potential problem areas. The relative lack of liquidity can be a financial nightmare when you need to sell in a hurry, and tenants can at times be a hassle to manage.
And, if you are buying property for cash right now, there are probably better things to do with your money, says Du Toit.
If residential property is the asset class you have chosen as the foundation of your retirement savings’ portfolio, bear in mind that you should diversify across areas and types of property.
Starting early, like 15 years ahead of retirement date or more, should also mean that minor ups and downs in the property cycle or an early short-fall on your loan repayments mean nothing when you look at the big picture.
As Du Toit says, with the market looking like it has cooled a little, it is becoming a buyers’ market once again.
Whatever you think about the property picture five years from now, you can bet prices will keep ticking upwards in the long run.
