Factors That Affect South African Real Estate Price Growth

By Franken, M.; Bloom, J. Z. et al. | Management Dynamics, April 1, 2011 | Go to article overview

Factors That Affect South African Real Estate Price Growth


Franken, M., Bloom, J. Z., Erasmus, P. D., Management Dynamics


ABSTRACT

South African real estate prices have experienced some degree of variability during the past 30 years. The ability to identify indicators that could be used to predict changes in the residential real estate price cycle would aid managers, industry specialists and investors to make informed decisions about the timing of real estate investments. The objective of this study was to identify the relevant indicators of residential real estate prices by considering existing research studies on this topic and assessing their suitability to be used as predictors of future price levels by means of an ordinary least square regression model. The results of this study indicate that eight of the indicators identified from a survey of the literature provide either good or acceptable predictions of future residential real estate cycles. The major contribution of this study is, therefore, that financial decision-making could be improved by focusing on these predictors of future residential real estate prices when considering the merits of an investment in real estate.

INTRODUCTION

Since the beginning of 2000 house prices in South Africa have seen four consecutive years of sustained price increases for the first time since 1984. Currently, however, the house price market is reflecting a downturn and reflects negative growth in line with the worldwide economic recession. It seems that house price changes were preceded and supported by a number of economic variables, such as changes in disposable income, affordability, inflation and interest rates. Even though property values tend to follow a regular pattern, known as the real estate cycle, residential house prices differ from other real estate classes. Residential real estate, for instance, appears to react more to downturns in cycles than commercial real estate does (Dokko, Edelstein, Lacayo and Lee, 1 999).

Internationally, research into the identification and assessment of performance measures of property is seen as one of the top five property research priorities. In a survey that identified 12 general property research topics, performance measures ranked first in the United States (US), third in Australia, and fifth in the United Kingdom (UK). Research investigating the existence and predictability of property cycles ranked third in the UK and fourth in the US. Property cycles and forecasting were indeed identified as some of the areas of the United Kingdom property market that are under-researched (Newell, McAllister, Worzala, 2004). Internationally, interest in the residential class, however, has lagged, leaving a gap in the research conducted on price prediction in this property class (Newell et ai, 2004). Therefore, the purpose of this study is to identify key indicators that may explain and predict changes in the residential house price cycle. The study proceeds by firstly identifying through a literature review, indicators that influence the residential house price cycle, secondly describing the methodology and data sources of the indicators, thirdly presenting the results, and finally discussing the model and providing implications for future decision-making.

RESIDENTIAL REAL ESTATE CYCLE

The residential real estate cycle forms part of larger economic cyclical activity, reflected in the business cycle. The aggregate economy is represented by the business cycle and indicates the level of economic activity in a country, which is usually measured by the Gross Domestic Product (GDP). Burns and Mitchell (1946), early leaders in business cycle research, defined the business cycle as follows:

... a type of fluctuation found in the aggregate economic activity of nations: a cycle consists of expansions occurring at about the same time in many economic activities, followed by similarly general recessions, (or) contractions (in absolute terms), and revivals which merge into the expansion phase of the next cycle; this sequence of changes is recurrent but not periodic; in duration, business cycles vary from more than one year to ten or twelve years. …

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