What The Hell?

From the latest Lightstone quarterly property report:

Is the Western Cape property price inflation about to go through the floor? And why has it diverged so far from the national average?

Going Up And Coming Down Aren't Equal

I've often heard people make the comments that "if property prices drop 20% it doesn't matter because they've appreciated 40% so I still have 20% appreciation". That assumption is incorrect. For example let's say your house had a starting price of R1 000 000 and a appreciated 40% to R1 400 000. A 20% depreciation will reduce the price to R1 120 000, not R1 200 000, which is only a 12% appreciation. The following graph illustrates this:
The green line is what people expect to happen - x appreciates by 20% and then depreciates by 20% to come back to x - the red line is what actually is required - x appreciates by 20% and then only has to depreciate by 16% to go back to x.

So when Standard Bank says that the median price has depreciated 5%, this means that in fact that 5.25% of appreciation is wiped out. Larger drops wipe out even more - 10% depreciation wipes out 11% appreciation, 20% depreciation wipes out 25% appreciation and 30% depreciation wipes out 42% appreciation.