House Price Index: #1 Key To Unlocking Property Performance?
Category Market Insight
House Price Index - What Is It?
House Price Index (HPI) is a value that property experts use to help owners understand their investment's performance in relation to real market dynamics. HPIs come in many different forms around the world from both the private and public sectors. In South Africa, the most reliable HPIs are calculated by banks and property sector specialist groups like CMA Info and Lightstone. HPI is used to reveal what a property would be worth if it had appreciated in value at the same rate as an area's average growth.
How Is House Price Index Calculated?
According to CMA Info: House Price Index is calculated by taking the most recent sales data in an area and for each year since the last sale date adding the average property price increase for that particular year to the sale price.
For example, property was bought for R1,000,000 on the 1st of January 2019 and we want to understand what its value should be if it appreciated at the same rate as other properties in an apartment block, complex, street, suburb, or city, province, or country. Using the real market prices for similar properties in the area it is determined that the property inflation rate was 4% in 2019, 3% in 2020, and 5% in 2021. Therefore:
- By the 1st of Jan 2020 the HPI value should be (R1,000,000 + 4%) = R1,040,000
- By the 1st of Jan 2021 the HPI value should be (R1,040,000 + 3%) = R1,071,200
- By the 1st of Jan 2022 the HPI value should be (R1,071,200 + 5%) = R1,124,760
Provincial Inflation Status (October 2021)
While provincial and even national property inflation rates are important to know about, getting your trusted property professional to perform a suburb-scale or even block-specific HPI valuation on your property's performance will reveal much more actionable information. This information will help you to know if it's possible to renovate for profit, determine whether or not your municipal valuation is correct, or if you can increase your rental value.
What To Do If My Property Valuation Is Far Higher or Lower Than HPI?
If your asset's value is performing very far from the area's average value trajectory then you may wish to consult with your trusted property professionals (especially if they have special block knowledge). If an asset in your property portfolio is performing very badly, then it may be a good idea to offload it. However, if it's only lagging behind a little bit then your trusted agent may advise you on how to renovate for profit. On the other hand, if an asset in your property portfolio is exceeding expectations by a large margin, then it might be the right time to liquidate the asset (aka quit while you're ahead). Whatever the case may be, knowing your properties' HPI and carefully interpreting the data with the guidance of a professional can help you maximise your portfolio's returns.
Author: Paul Wasson
