Buying power does not equate to value

Buying power does not equate to value By Coert Coetzee

I'm amazed at how the smart people are not as smart as they think. I'm referring here to the prophets of doom and the economists who are telling the world how house prices are falling at the moment, and explaining how the prices of houses being sold now and the size of bonds being registered now compare to those that were sold or registered last year. One such clever bond originator, who is now providing “statistics” too, came to the educated conclusion that house prices have fallen by 5.5% since last year. And it isn't just the smart bond originator who has come to this conclusion. The banks are doing the same, although at least they believe that property is still growing positively. You're probably wondering why I am suggesting that this bunch is stupid, so let me explain.

Let's say that 10,000 first-time buyers bought houses in September 2007. With their income and affordability they could each buy a house for R500,000. One year later the interest rate has gone up by one percentage point. In the meantime they've also had a salary increase, but this was immediately cancelled out by the high inflation rate. This means that with exactly the same affordability amount or buying power they can now, due to the higher interest rate, only afford a house of R470,000. So that is what they buy.

Let's summarise. In 2007 they bought R500,000 houses. In 2008 they are buying R470,000 houses. But this doesn't automatically mean that they are buying R500,000 houses for R470,000. They have moved into a different price bracket as a result of inflation and interest rates. So it's not the prices of the houses that have fallen; it's the buying power that has decreased.

I know some people are now probably confused, so I am going to explain with reference to a fictitious and extreme example: if things go very well in year one, most people buy expensive houses of R1,000,000. If things go very badly in year two, most people buy houses of R500,000, because that's all they can afford. If you now compare year one's sales with year two, and you have exactly the same number of transactions, it will appear at first glance as though the prices have dropped by 50%. But that's not the case. Instead it is the buying patterns and buying power that have changed. Year one's houses are not the same houses as year two's. They may not even be in the same area!

This is the fundamental problem with these smart people's indices. They are comparing apples with pears. I know growth rates are down, but I think the economists are being irresponsible with their incorrect analyses. These statistics create the wrong perceptions and fan negativity.

Is bad or is it good?

Let's leave the economists now, and turn our attention to the wonderful world in which we live. There are two sides to everything. How bad or how good something is depends on you. Some people see problems, while others see only opportunity. Today I want to take a look at how recent world events might influence us. I'm going to list a few events, and then look first at the downside , before looking at the upside. The downside is generally the opinion of pessimists, while the upside is my opinion. Of course, you know that I am the eternal optimist!

National Credit Act
Bad: Some people, like some estate agents and bond originators, are still blaming the National Credit Act for their misery that started at the time of its implementation in June 2007. After nearly a year and a half, they still don't know how to deal with it; so they are retrenching people and closing businesses.
Good: Companies and clients who use the Treoc double trust structure are not being affected by it at all. On the contrary, they are benefiting from it. Trusts with at least two trustees, one of whom is an independent trustee, are excluded from the National Credit Act.

Electricity Shortage
Bad: Developers are complaining because municipalities are turning down proposed new developments due to their inability to provide electricity.
Good: The shortage of new developments will result in a shortage of housing. This will in turn eventually lead to good capital growth, once demand starts to exceed supply. On average it takes four years to take a new development from planning through to occupation. So those developments that are being completed now were already in planning a few years ago. And most of those that should be completed in 2012 are not even in planning right now. I think 2012 is going to be a bumper year for the capital growth farmers!

High Interest Rates
Bad: People who didn't plan and take precautions are now losing their houses.
Good: People who planned and took precautions, like the Treoc Investors, are buying the houses of those mentioned above at low prices.

High Oil Price
Bad: It chases inflation up and causes interest rates to go up or to remain high. Uninformed people think the high interest rate is permanent, and so they panic.
Good: Thanks to inflation the interest rates are high, and this keeps property prices low. The buyers' market is getting better every day. Informed investors know that this is a cycle, and so they don't panic. They know that everything that goes up will come down again - as has been happening for centuries already.

The Global Credit Crisis
Bad: Fear causes people to make wrong decisions; they think that debt and credit are evil, or they think that the bank's money is all gone and so they don't even try to get credit. They don't buy houses.
Good: Well-informed people know that the banks' main source of income is credit extension, and they use this opportunity to get bonds. They buy houses like never before. I myself have bought six houses in the last two weeks – without it costing me a single cent!

ANC Split
Bad: We are going to have a civil war.
Good: The government immediately pulls up its socks. It's been a long time since they made so many of the "right" noises in such a short time. They are even going to tackle corruption! Strong opposition will do wonders for our country.

American Presidential Election
Bad: The bottom has dropped out of the world for white racists.
Good: To me, a change is as good as a holiday, and I think most people feel that way. A holiday feeling is an optimistic feeling, and I think Obama has caused a worldwide optimism to take hold. Let us hope it continues to grow, because if there is one thing that the world needs right now, it's optimism!

Happy House Hunting!