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Monday Apr 20, 2015

Property speculation 'loses its allure'

Speculation in South Africa's residential property market appears to have plunged to its lowest levels in more than a decade, according to property analysts Lightstone.

It said at the peak of the housing boom in 2005 not only was annual residential property inflation at more than 30 percent, but 37 percent of properties that were sold at that time had been bought within the past two years.

"This indicates that many of these properties were bought with the intent of being sold in the near future at a profit," Lightstone said.

However, Lightstone said only 14 percent of the properties that were sold last year were bought within the past two years, indicating that speculation in the market had reduced significantly.

Lightstone said owners were holding on to their properties longer and about half of all properties transacted last year had been bought more than eight years ago.

"The majority of properties that are currently transacting are, therefore, stock that was purchased before the housing crash in 2007/08," it said.

Lightstone said its latest analysis of the residential property market showed that it was popular during the housing boom and not uncommon for speculators, renovators and investors to buy properties, fix them up and sell them for a profit, but there had been a significant reduction in this behaviour in the past five years.

It said the percentage of properties sold within two years of being bought started declining rapidly during the subprime crash of 2007.

"While properties sold within two years of being bought still transact at a significant premium, they are a rare occurrence when compared to transactions between 2004 and 2007," Lightstone said.

The lower level of speculative buying in the residential property market appears to have been depressed by the lower growth in house prices, which could limit the profit made by speculators.

John Loos, the household and property sector strategist at First National Bank (FNB), said earlier this month that despite a 6.7 percent rise since October 2011 in real house prices - prices adjusted for consumer price index inflation, the average real house price level remained minus 17.2 percent below the high reached in December 2007 towards the end of the residential property boom.

"Looking back longer though, the average real price remains 66.2 percent above the January 2001 level, a time back just before the boom time price inflation started to accelerate rapidly," he said.

Loos said FNB had revised downwards its average house price growth forecast for this year to around 5 percent from between 8 percent and 9 percent at the beginning of the year because of a host of negative factors, including electricity supply disruption issues, significant effective personal tax rate and fuel levy hikes and the prospect of earlier than forecast interest rate hikes because of a deteriorating domestic inflation outlook.

Lightstone stressed there was definitely still value in buying properties, fixing them up and selling them at a premium despite the decline in speculation activity in the residential property market over the past decade.

"While national house price inflation is currently 6.66 percent, properties sold in 2014 that were bought within the previous two years experienced an annual house price inflation of 19 percent," Lightstone said.

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