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16 September 2004
John Loos takes the view that it is futile to speculate over the two great debates running in South Africa at present, to wit: whether the rand is overvalued or undervalued; and whether a house price bubble exists. A more appropriate discussion would be about possible shocks that could have an adverse affect on the average house price level.
He notes that it is natural to get uneasy following a period of sustained asset price increases as we have seen in the housing market starting in 1999/2000 and that we could be heading for a national house price crash as we had between 1984 and 1986.
His comparison of the economic landscape of the mid 80's to the current landscape makes salutary reading. For instance, mortgage rates rose from 11 percent at the end of 1981 to 21.5 percent in the second quarter of 1985. The domestic and security situation had deteriorated significantly towards the mid 1980's and this would have dampened the market further. Compare this with the current situation where interest rates have come down and the definite improvement in the domestic political situation along with consumer improvement.
As a response to those who say that the market has reached "extreme" valuations by historical standards, he finds that since 1970 house prices have under performed nominal GDP growth and that with 1970 equal to 100 in both indices, the house price index was only 33 percent of the value of the nominal GDP index by 2004. The average payment to remuneration ratio is not far off its lows of 2000 and 2001.
He therefore concludes that even though the current rapid increases will taper off somewhat, it will need a drastic shock to the environment to cause a decline on a par with the mid 1980's. Of the following three possible shock scenarios: a rand crash; a food price shock; and an oil price shock, only the last is the most likely and potentially the most devastating.
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