House prices exceed replacement costs

05-09-2005

Interesting implications can be derived from the fact that, according to Absa's latest house-price indices, old house prices are currently only 5% cheaper than the prices of new houses.

This is the opinion of Erwin Rode, CEO of Rode & Associates property valuers and economists.

"As a rule of thumb, house prices depreciate by 1% point per annum relative to the market value of newish houses; therefore, after 25 years a house is typically 25% cheaper than a newish house."

Considering that Absa's book probably represents houses with an average age of maybe 25 years, he says, one would expect the discount of old to new houses to be about 25%. And in fact, for many years, until two years ago, Absa's figures did show a 25%-35% discount. This implies that old- and new-house prices were more or less in equilibrium until two years ago. “The fact that this spread between old and new has now narrowed to about 5%, implies that house prices today are about 20% (25% - 5%) above replacement costs. Our longitudinal analysis (in which we compare the movement in prices to replacement costs since 1966) confirms this conclusion.”