Is the house price party over?

If you look at the latest Absa House Price Index which shows month on month house price growth for July 2007, you will find it at the lowest recorded level for seven years.

According to Absa the 0.5% increase from June to July 2007 is the smallest increase since September 1999.

First negative real house price growth this century

With the inflation rate pushing through the 6% level it has resulted in the first negative real house price growth in years.

What this means is that for the first time since 1999, after adjusting for inflation, the value of the average house has actually decreased slightly over the last month.

There are a number of reasons why, and the most talked about one at the moment is the new National Credit Act. Many economists are blaming the Act, but according to Absa senior economist Jacques du Toit, the slower growth is “mainly the result of higher interest rates.”

It’s been some time now since interest rates were gradually raised and there was not much effect to begin with. But now it’s adding up, along with high inflation, and the effects are starting to show.

Du Toit believes it is still too early to determine what influence the National Credit Act (NCA) is having on prices. We know there are admin backups and we know that more bond applications are being rejected due to the Act, so chances are those effects will also start filtering through.

What does this latest news mean?

It means that if you have invested in property without knowing how to do the calculations it may be time for you to start worrying. If you bought planning to sell (speculation), hoping prices would go higher, and if you cannot afford to hold onto your property with the higher interest rates, and if you then have to sell, you may find fewer buyers and you may not get your price. You could lose money.

Why do I not believe in property speculation? Because it is a gamble. You buy in the expectation that prices will rise and that interest and inflation will not. You have no way of knowing what will happen, and so you are taking a chance. For the past five years, since mid-2002, prices have risen – to begin with spectacularly, more recently less so. But now for the first time since September 1999, they are almost static.

Where does this leave the property investor who invested according to the Property Pro method?

* In this case, you know you do not make your money when you sell. You always make your money when you buy. In fact a true investor seldom sells. So you didn’t buy in the hope of selling even higher. You bought because the sums made sense and the income more than covers your expenses. So you’re not worried.

* You also know that income is more important than capital and you know how to do the worst case calculations and how to apply the Mercedes Principle. You would have done the worst case calculations and decided that you would still be okay.

This means that if you invested according to the Property Pro method you have the peace of mind of knowing that whatever the market does, it is not going to affect you too badly.

On the other hand, if you did NOT follow this strategy you may be in for a rude awakening if you built your hopes and dreams on capital growth and then went out on a limb, financially.

So you can see that the current conditions may work for you or against you, depending on what kind of investor you are. There are three types when it comes to capital growth.

1. “Investors” who buy in order to sell and in doing so make a capital gain. This group is also called speculators.

2. “Investors” who develop land and in doing so depend on capital growth to earn a living. (and make investments)

3. The third group of “investors” follow a system where you buy to hold, but use the capital gains to increase their capital base and sometimes even their standard of living.

The phantom of capital gains

For the last twenty years I have taught people that if you build your wealth on capital gains you are going to get a lot of nasty surprises.

I have personally experienced the reality of capital gains: it is just a phantom gain.

Capital gains happen when the markets gets emotional and starts pushing the prices upwards but it can literally disappear overnight when the mood changes and confidence drops.

It does you no good to have R1 000 000 on paper when you cannot sell the property to turn the paper money into liquidity. I have seen this happen in 1984, 1987 and again in 1998-9.

This very week several of my students, by making use of www.propertyinvestments.co.za, bought property for less than 50% of the bank’s valuation. (By the way – do you know that last month alone there were 1602 properties (with judgements) listed on www.propertyinvestments.co.za – the only website in South Africa where you can find real property bargains?)

Is it good value at half the price? You can’t tell without doing the calculations

Now just because you get a property for half the bank’s perceived value does not mean it is a good investment ... you still have to do the calculation the Property Pro way.

So the question is – who really knows what a property is worth? If you buy a property the bank says is worth R800 000 for R400 000, then who is right about what it is worth? You? Or the bank?

Of course the bank is really just following the crowd in the first place because their valuation is based on what they think they could sell it for.

The only unemotional valuation

That’s why I teach my property students to do the calculations. You base the value of the property on what it brings in. That is the only unemotional measure, in the end.

For the last five years I have said that serious investors can’t wait for the interest rate to rise simply because the real property investment jewels will only show in “bad” times.

When everyone else is getting out of property ... that’s the time to get in

If I look at what is happening now, true property investors may be in the pound seats if the interest rate goes up another 2% (especially if it is a slow increase over a long period of time, as the interest rate hikes have been over the past year or so) and if the banks are forced to apply legislation according to the National Credit Act.

To summarize: if you are a property investor and you invest according to the Property Pro Investment method, the timing may soon be ideal for you to buy.

If not – I would suggest you get on the course as soon as possible because you are going to need all the advice and strategies I teach if the market turns against you.

What if the market does not do what I think it might do? Well, you will still be in the pound seats simply because you know how to invest! Property Pro Investors know how to make money in “good” and “bad” times.