Home valuations in a shifting market

If, as the The Economist magazine predicts, a global house-price slump is on its way, based on evidence in nine ‘rich economies’, SA’s market will similarly take a beating, which will significantly impact residential property prices. As it is, according to independent property economist and property valuer firm Rode & Associates, this will be the seventh consecutive year of decline in real property values (i.e. after having deducted inflation).

While many can directly attribute residential property value declines to a poor economy, rising interest rates and higher than wanted inflation, cost of living expenses are escalating faster than wage increases which are causing, in some cases, household financial distress. As a result, many owners are fast approaching the need to sell their once ‘higher’ valued homes in a buyers’ market.

When linking interest rates to stagnating and/or declining incomes, the result, says Erwin Rode, MD and founder of Rode & Associates, is a depression of prices because of shrinking ‘affordability’, and this is a key word. Obviously, when affordability to sustain a home loan is threatened, sellers look to sell their property, likely the highest income drainer, and they want the highest price possible.

But, says Rode, with interest rates rising as quickly as they are, combined with a stagnating economy and acceleration in inflation, “the table is set for decelerating house prices, if not outright declining prices.

“The thing is, after a boom period (such as was experienced when interest rates dropped to help sustain South Africans through the pandemic), it is hard for sellers to adjust their bullish expectations downwards, resulting typically in longer periods that houses are on the market before a sale is realised.”

To avoid this, a home has to be priced realistically. Without the assistance of a valuer or property practitioner in the current environment, there are likely to be some shocks to sellers, given the rate of inflation. Here is one, bearing in mind that all things are relative: SA Inflation’s website calculator• shows that R20 000 on 01 January 2002 is the equivalent to R60 802.29 on 01 November 2022. So you would expect that R20 000 to be worth more right?

Another is the measure by Lightstone, in April, of the effect of inflation on property. For example, a property worth R1-million lost R50 000 of its value to inflation over the three months up to April. These two stats give you some idea of how inflation has impacted home values.

Adjusting homeowner-seller expectations, as Rode says, is exceptionally hard, particularly when they have added value over the years, whether it’s in additions, alterations or general updating. Rode confirms that he knows of no empirical study that the costs of renovations actually increase the value of a property by the same amount spent. “I presume it depends very much on the specifics,” he says, “including whether the homeowner has over-capitalised in a specific neighbourhood.

“For instance, if the house’s market value is currently below the average for your neighbourhood, then the danger of over-capitalising is less. Another factor that may play a role is where we are in a property-price cycle; in a boom period, the danger of over-capitalising is evidently less.”

How homeowners ‘estimate’ the value of a home before engaging the services of a professional valuer is not as easy as one may think. While owners may compare their house and its size, facilities and location with other properties sold recently in the area, to get to the most realistic and true value would require statistical analysis, called multiple regression, says Rode. This is when analysis takes into account multiple variables that are historically known to predict the value of a single item.

Agents do not use regression analysis but rely on comparative sales, and their ‘gut’, which Rode says, is far better than the layman’s interpretation of value.

Even if a home ticks the right boxes and is priced according to similar sales or the use of deep analytics, the time a house stays on the market should (on average) be no more than three months. If it stays longer, the implication is, says Rode, that the asking price is too high or there is poor marketing.

A correcting seems inevitable for 2023, especially if a recession manifests.

Writer : Kerry Dimmer