However, once the prices at the higher end had adjusted sharply upwards, driven by the surge in demand, the upward demand shift subsided and many buyers may have even started to look towards the lower end for better value for money.
This year, the gap in inflation rates between the median and mean has first narrowed, and then the median inflation rate has overtaken the average price inflation rate, which suggests that major demand shifts up or down the price ladder may be over for now, and that the superior performance of the lower end is all but over.
While rising interest rates may have been encouraging a portion of home buyers to look at cheaper market segments, against that a portion of lower income groups may be temporarily dropping out of the market altogether due to their financial strain, thereby offsetting any demand gains that the lower end may be receiving due to the downward shift. Lower income groups are believed to be experiencing greater financial strain than their higher income counterparts due to being harder hit by high food and transport cost inflation (lower income groups spend a higher portion of their income on such items) in recent times.
STABLE PERFORMANCE
Therefore, the recent relatively stable performance of the median price inflation rate in recent month is probably not yet an indication of the market deterioration coming to an end, but rather an indication that the activity levels of the higher end are improving in relative terms compared to the lower end causing a relative upward shift in activity (note that in absolute terms higher and lower end activity levels have probably still been declining in recent months).
The average price index’s declining inflation trend is probably a better indicator of the overall market and price trend, i.e. still weaker. However, there may be some use in comparing the trends of mean and median indices compiled from the same data set, because divergences between the two may prove insightful in terms of relative shifts in activity up and down the price ladder.
AUGUST AVERAGE PRICE
As at August, the average price of a house transacted according to FNB’s sample of the market was R680,541 while the median price was R548,874. In reality, though, both measures are over-estimates of what the average house value in South Africa actually is. This is because higher income households are generally more mobile than low income ones, which means that a greater percentage of total stock gets traded in middle-to-upper income areas as opposed to, for example, former black townships.
Given that both of the above indices are based on properties transacted, it stands to reason that the middle-to-upper income end will have a significantly higher weighting in the indices. In reality, therefore, if we could value every existing property down to RDP housing regardless of whether it gets transacted, the average and median values would be significantly lower.
Therefore, while such house price indices are useful from a trend analysis point of view, they are of limited value in calculating average values for the country, as they only incorporate houses that get transacted.
End of Part Two of Four
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