The average R1m house today could cost you R25m in 25 years.
The idea sounds unbelievable but it isn't, once you consider what the average price of a house was in 1995 – R82,000, according to the Stats SA house price index.
Twenty-five years may seem like a long time but to put this into perspective, it’s the same time frame most banks give home buyers to pay off their home loans.
The primary drivers behind this astronomical growth rate are house price inflation (driven by consumer inflation); demand for housing, which leads to real house price growth and the compounding effect of year-on-year growth of all these factors.
However, the impact of inflation in the context of SA is the one constant driver of the price increase in the cost of property, particularly its “compounding effect”.
The effect of compounding refers to the year-on-year multiplying of the inflation rate (5.5%) added to the principle, which in this case is the price of the house. This effect repeatedly gives rise to exponential growth in the price of the house over time.
While the SA housing market is already seeing short supply and high demand, it is safe to say that the last two years of lockdown will have worsened the rising trend of house price growth.
This will result in continued house price inflation, in which the constrained supply and high demand at work adds to the snowball effect of compounding growth in house prices.
The simple math to understand how the average R1m house grows to R25m, is by taking the rate of 6% (average rate of inflation in the past 12 years) compounded over 25 years and it would be worth R4m after 25 years.
When R4m has been adjusted to include real house price growth (4%) and other factors that push the price of homes up, such as demand for housing through densification. This could add another 4% to the calculation, therefore at 14% year-on-year, the average R1m house will cost you R25 million! That is 25 times what you would pay for it today.
History and current trends suggest that the price tag of R25m is a conservative figure, given that the growth in certain suburbs in Cape Town and Sandton is about 12.6% year-on-year. Parts of Cape Town’s city bowl experienced growth of 19% year-on-year.
How to take advantage of growth in house prices?
The short answer is if you can afford to purchase your primary residence today or investment property, do it now because at the very least it’s only going to get more expensive as the years go by. Take advantage of the consistent growth driven by inflation compounded over the years.
As a prospective homeowner in search of a home of your own and homeowners seeking opportunities to trade up, it’s important to invest in an asset that keeps up with the rate of inflation and can outpace inflation through its ability to appreciate over the long term. This is a far better investment strategy than to simply save money, which can only stay neutral or behind inflation by sitting in a savings account.
Akinnusi is CEO of MortgageMarket.co.za
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