A report by a top property economist yesterday suggests South African house prices may be overvalued by as much as 25%, and that it could take "many years" for prices to fall in line with actual values.

This is despite estate agents claiming SA is a buyers’ market and that it has never been cheaper to buy than now.

In the latest issue of the Rode Report on the South African property market, Erwin Rode, CEO of Rode & Associates, said real house prices - excluding inflation - were still 25% higher than suggested by their trend line of the past 44 years.

Mr Rode said research using Absa ’s house price index - which accounts for a third of mortgage bond finance - and the Bureau for Economic Research’s building cost index showed that house prices were inflated.

"Considering that asset prices are mean-reverting, the implication is that a resumption in the down trend in real house prices is inevitable - it is only a question of time and speed," Mr Rode said.

"A decline in real house prices does not necessarily mean nominal prices will decline. A more likely outcome is that nominal prices might grow at, say, 2% per annum for a few years while inflation is at, say, 6%."

Last year was a tough one for real estate and, after a three-year severe downturn, the market is still struggling to recover.

People wanting to enter the residential property market were faced with a difficult choice between buying and renting as the uncertain economic outlook seems set to continue for at least a year. Mr Rode said first-time buyers would be better off renting than buying in the next five years as overvalued houses would not have capital growth.

"It will take many years for prices of residential properties to come in line with their actual value, and South Africans are better off investing the difference between their rental instalments and what they would have paid into a bond elsewhere every month," he said.

But Jawitz Properties CE Herschel Jawitz said while Mr Rode was correct in predicting that property prices will decline in real terms - at least for 12-18 months - it was difficult to concur prices needed to decline in real terms by 25%. He said the latest Absa research showed residential property prices had already declined by 14% in real terms.

"This would predict the total decline going forward at about 40%. I simply don’t see that happening, especially in the metro areas like Johannesburg, Cape Town and Durban," Mr Jawitz said.

He said in these areas there was demand for well-priced properties.

"This is very different to the coastal leisure areas where demand is soft at all price levels and real prices will continue to decline for some time. Even on the buy-to-let side, the picture is not all doom and gloom as stated by Mr Rode".

Lanice Steward, MD of Anne Porter Knight Frank, agreed that national statistics were seldom relevant to Cape Town.

Mr Rode said previous growth in house prices could be attributed partly to "irrational exuberance". Over the past 10-20 years buyers had paid prices above replacement value taking ageing into account, he said.