Make investors feel that Cape is the place to have a home
David Bullard
Out To Lunch
NINETEEN years ago, just before I emigrated to South Africa, I sold a flat on the outskirts of London for the equivalent of about R40 000. Today that flat would probably fetch around R1.5-million.
That's partly due to the depreciation of the rand over the past 19 years from an exchange rate of around R2 for £1 to R10 for £1. Even so, with average inflation running as low as it has in the UK over the past two decades the flat should really only be worth R500 000, even taking into account the massive decline in the value of the rand. The huge difference between its book value, if you'd care to call it that, and its market value is entirely due to the booming property market in the UK.
According to some experts, house prices in the UK are expected to rise between 10% and 20% across the board this year, with some sought after areas in inner London even exceeding those figures.
The average price of a house in the UK is now R750 000 - and you don't get very much for that price. I suspect that most people in the UK would be unlikely to be able to service a bond of much more than R600 000.
A house in Winchester was featured in a recent edition of a British national newspaper. It was a renovated terraced house with the front door abutting the street, two rooms downstairs and a small kitchen at the back of the house. Upstairs were two bedrooms and a recently installed bathroom. The house originally had an outdoor privy in the back garden. There was no garage and a miniscule back garden barely 15 metres long and about half as wide. The house sold for the equivalent of R1.3-million and the owners clearly believed they had picked up a bargain.
In London you now need the sterling equivalent of R5million to get into the unfashionable end of Fulham. If you are happy to commute into London and live in suburbia, you might get a three bedroomed semi-detached house for as little as R2-million if you don't mind living on a flight path from Heathrow. It doesn't get much better even if you're prepared to move out of London. Friends sold a remote five-bedroomed house in the Yorkshire Dales last year for R2.5-million. If they'd waited another year they could have probably sold it for nearer to R3-million.
The boom in UK property prices is a simple case of demand outstripping supply. London prices have shot up because it is now regarded as the place to live. The quality of life, even for a city, is perceived to be better than in many other European cities. It is also convenient base for rich Americans who prefer to buy property in London because it saves them the bother of having to learn some silly foreign language. Thriving stock markets and generous annual bonuses, particularly in the financial services and computer industries, have put substantial amounts of cash into people's hands. The first thing most of them do is buy property in a fashionable area of London, partly because they can finally afford to do so and partly because they believe property is an investment as well as a status symbol. This doesn't always hold true. In the late 1980s and early 1990s many people found themselves repaying loans for homes which were suddenly worth substantially less than the price they had paid at the height of the boom. In the current euphoria, most people have chosen to blot out the lessons of the past and prices are roaring ahead once again; house price inflation or an appreciating asset, depending on your point of view.
Which brings me to local property prices. I doubt whether I could recover the price I paid for my house in Johannesburg nine years ago. So with a fall in the buying power of the rand over that period, I have lost money. Fortunately, my flat in Cape Town has appreciated in value and is now worth as much as the house. If the property developer who is interested in buying the site bites, it will be worth substantially more. Even so, it is still way below equivalent property prices in comparable cities around the world.
I'm told that the gap between the cost of buying a plot and building a new home compared with the price of existing property has widened to over 30%. This means that the market is out of equilibrium and only one of two things can happen. Either building costs must come down (which is highly unlikely) or the price of secondary market stock has to rise to gradually close that gap. My guess is that we are long overdue for a residential property boom, particularly if we can convince foreign investors that Cape Town is the place to have a home .
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