Whatshot
Know the worth of your Property Portfolio
Know the worth of your Property Portfolio
Date: 2021-09-23
What is my property worth? We are often asked to assist homeowners with market valuations on their properties for a variety of reasons, but predominantly as an initial step towards actively marketing the property to sell it.
The beauty of the commercial property market is that values are driven purely by cash flow generated through the property and the anticipated length of time that cash flow will continue.
Robert Kiyosaki, author of bestseller Rich Dad Poor Dad, and multiple other great books teaching us on financial literacy, building wealth through investing in assets Ð specifically real estate, taught us that if something generates cash it can be classified as an asset and if it consumes cash, it should be thought of as a liability.
Your residential property only has value in terms of what somebody in the market will pay for it or the rental stream it can generate. The price of residential property, measured by house price indexes and published by most large commercial banks in South Africa, is a good barometer of the property market cycle and will help you as a homeowner determine what your pricing strategy should be.
The key point to understand is that all asset markets go through cycles and the idea that residential property markets only steadily increase in value is not altogether true.
With markets such as gold, traded by many people daily, prices immediately reflect changes in demand and because the market is so large single transactions can't have any influence on the overall market. The residential market is more complicated and far slower to adjust to changes in demand.
As gold is a homogenous good, with one Kruger Rand being like the next, pricing between them will be the same. Residential properties vary significantly with even sectional title units within a scheme of the same size, able to have significant and subtle differences that will be reflected in market demand and therefore pricing.
Homeowners often have a psychological barrier at selling a property at a price below which they may have paid, and therefore simply decide not to sell. In times of lower demand, volumes adjust immediately but prices are what economists call 'sticky downwards'.
Most people do not calculate the real inflation-adjusted price of their homes. If CPI inflation is currently at 4.6% (July 2021) down from 4.9% and 5.2% in the prior two months, this means that your real home price is being eroded by at least this amount if the nominal growth rates are at zero.
In addition, we all know that unless you invest regularly in the maintenance of a residential property, its desirability and demand for it will decrease. To determine the current nominal growth rate of overall house prices in South Africa, the FNB House Price Index gives us some insight.
The recently published August year-on-year rate is 2.6%, which re-enforces the established downward trend in the nominal growth rate deceleration since April 2021 which was recorded at 5.1% with May, June and July being 4.7%, 4.1% and 3.4%.
Very rarely does a nominal House Price Index growth rate go below zero, even though we see that real growth rates currently are. We saw some of this in 2001 and then again from May 2008 to July 2009.
Given this change in the demand cycle, what does this mean for you as a prospective seller of a residential property? Don't over-price your property. Listen to your estate agent and be ready to decrease the asking price within 30-60 days of listing the property if the market is not responding.