Friday, 17 September 2010

How Affordable is Cape Town Property?

Amid tough economic times and ongoing difficulty in obtaining mortgage finance, the importance of affordability in the housing market remains paramount.

Accessible pricing remains a major obstacle to many new entrants to the housing market, and is a crucial factor for many other buyer types, including those downscaling for retirement or wishing to upgrade to meet the needs of a growing family.

Yet affordable homes are not a myth, says Pam Golding Properties’ MD for the Western Cape metro region, Laurie Wener.

“There are a number of suburbs in the Cape Town metropolitan area where one can obtain decent, well-built homes in the R600k to R3m price range, ranging from compact apartments ideal for young couples and professionals, to larger free-standing homes. If one only knows where to look, one may be surprised by the value for money which can be obtained, and the large variety of stock which is currently on offer.”

Western Seaboard Cape Town’s Western Seaboard has long been a popular area for first-time buyers, young professionals and downscalers seeking compact, affordable homes which are easy to maintain.

In recent years as the residential area has expanded in size, so too has the offering of schools, shops, hospitals and other amenities, making these suburbs increasingly popular with young families as well.

PGP’s area manager, Ivan Swart, says there is a wide variety of affordable housing options to choose from in suburbs like Parklands, Sunningdale, Flamingo Vlei and Bloubergrant, as well as in the Melkbosstrand area further to the north.

These range from studio apartments to secure complexes and even free-standing homes. “Newer areas such as Big Bay and Atlantic Beach Golf Estate are growing rapidly in popularity with this segment of the market, and we continue to see a lot of offers from first-time buyers, older buyers downscaling for retirement, and young professional couples.

Unfortunately the limited access to mortgage finance remains an inhibiting factor, but the demand is certainly there.”

For R600k to R1m, one can obtain a two-bedroomed apartment, ideal for new entrants to the housing market and young couples. In the R1m to R2m price range, one can buy a sizable free-standing family home with three bedrooms and a double garage in Parklands, Sunningdale, Flamingo Vlei, Bloubergrant, or Melkbosstrand. This price bracket will also secure a starter home in the secure Atlantic Beach Golf Estate.

“For buyers in the R2m to R3m bracket there is even more choice, from a free-standing starter home in the Atlantic Beach or Sunset Links Golf Estates, Big Bay estates or Sunset Beach, to a two-bedroomed beachfront apartment, suited to those who are retiring or for those wanting a lock-up-and-go lifestyle.

We have a wide selection of stock in the latter category at present, with some excellent value for money on offer.”

South Peninsula

The towns of the South Peninsula also offer a number of options for buyers seeking property below R3m – and they often come with a view or even walking-distance access to the beachfront।

One can obtain a free-standing three-bedroomed home in Kommetjie for under R2m, or a cottage in Scarborough for R1,25m.

PGP’s area manager Sandi Gildenhuys says there are also a number of homes in this price range in Fish Hoek. “One can obtain a one- or two-bedroomed apartment in central Fish Hoek for just R500k to R600, while most free-standing homes in the valley sell from around R850k to R1,4m.”

Mountainside properties commanding panoramic views are a little pricier, but still a very affordable R1,8m to R3m. The town has always been popular with retirees due to its lovely flat and easy-to-access beachfront, but is also attracting young families and even professionals who commute into town.

Towns like Kommetjie and Noordhoek are also attracting increasing numbers of young families who are choosing to raise their children in a more rural environment, and who want affordable, sizable family homes.
Southern Suburbs
Cape Town’s leafy Southern Suburbs are widely perceived as offering quality family homes on large plots, located close to the University of Cape Town and a number of top schools. The reputation is fully justified, and such homes frequently come with substantial price tags.

But, says PGP’s area manager Howard Markham, it would be inaccurate to think that the Southern Suburbs are out of range of smaller budget buyers. “There are a number of options for entry-level buyers and young couples wanting to obtain a foothold in this sought-after market, and even for family buyers needing larger homes.

“Suburbs such as Observatory, Claremont, Kenilworth and Pinelands offer plenty of homes priced under R3m, as do Bergvliet and certain pockets of Tokai. One can still obtain a three-or four-bedroomed home on up to 800sqm, within this range.

And Harfield Village, for example, is growing steadily in popularity with first-time buyers and young couples without children, who love its manageable-sized plots, attractive homes and central location. One can buy a four-bedroomed home with a double garage here for R2,35m.”

Markham says there is also limited activity in the investor market under R3m at present, mainly from parents buying sectional title units for their student children.
Atlantic Seaboard and City Bowl

The growth of residential opportunities in Cape Town’s Central City has opened up many new options for entry-level buyers and those seeking homes under R3m.

One can obtain starter apartments in the heart of the business district for around R500k for a bachelor unit, or R1m to R2,5m for larger two-bedroomed options. These are extremely popular with young professionals working in the city, and are also considered by investors due to the rental returns they can command.

Those wanting to live close to the sea might consider Mouille Point, where one can still obtain a one-bedroomed apartment from R1,25m. And in neighbouring Green Point, bachelor flats are priced from around R500k, while larger two-bedroomed units can be obtained for closer to R2m.
Although more upmarket areas of the City Bowl, such as Oranjezicht and Vredehoek, tend to attract higher prices, it is still possible to obtain older homes in these areas for under R2,5m, says PGP’s area manager Basil Moraitis – if one has the budget and willingness to carry out renovation work.

Lanice Steward, MD of the Cape Peninsula estate agency Anne Porter Knight Frank (APKF), says the emerging middle class will boost prices in the traditional Cape suburbs.

“Anyone buying for investment purposes in the Cape Peninsula right now will be onto a sound investment no matter which suburb he chooses,” said Steward.

“The reason is clear: with a mountain and a nature reserve taking up 65% of the available land, property in the traditional Cape suburbs will increasingly be in short supply. It is in these traditional suburbs that the emerging middle class aspire to live.

“This does not mean that Cape Flats suburbs like Grassy Park, Mitchells Plain and Ottery will not gain in value, but areas like Lower Wynberg, Rondebosch East, Diep River, Retreat, Goodwood and Sea Point, which are still low priced are set to take off.”

The best long term prospect, and the one she would tip to any person looking for a lifestyle as well as a sound investment, said Steward, is Simons Town.

“With commuting problems hitting the outlying areas, the convenience of a comfortable 53 minute train ride to the city is increasingly appreciated. Add to that a charming Southampton-type main street, good restaurants, a flourishing yacht club, a challenging golf course (currently in near-perfect condition), a lively cultural life and wonderful mountain walks and minimal crime, and it is quite clear that a decade from now Simons Town will be the place to live.”

This fact, said Steward, is already recognised by buyers who can expect to pay anything from R2,5m to R4m for a standard three bedroom house, but who are still able to find bachelor pads below R1m while at the upper end of the price range there are many homes priced in the R10m to R20m bracket. – Eugene Brink

Home owners must reduce prices by 10pc to sell properties

A total of 32 per cent more estate agents reported a fall rather than a rise in house prices in August, compared to 8 per cent the previous month, according to the latest housing survey from the Royal Institution of Chartered Surveyors. That is the lowest reading since May 2009.

It comes amid a decline in the number of first-time buyers – a key component in maintaining values.

Stuart Allan, a RICS member from Bishop Auckland in Co. Durham, said: “There is a dearth of first-time buyers principally due to difficulties in obtaining mortgages and this has depressed the value of houses at the lower end of the market.

“These houses are typically selling for up to 10 per cent less than the estate agents advertised prices and this is reflected throughout the market.

“Vendors or property are required to be more realistic in their sale price expectations.”

Tom Goodley, a RICS member form Norfolk, said: “There appears to be a lot of over priced houses on the market, and a shortage of buyers. The basic economics of supply and demand must prevail.”

The share of the market occupied by first-time buyers dropped to 34 per cent in July, down from 38 per cent the previous month and the lowest proportion since the beginning of the credit crisis in August 2007, according to the Council of Mortgage Lenders.

First-time buyers are struggling to get on the property ladder as banks further tighten lending criteria.

These buyers have a typical deposit of 24 per cent of the value of their home, up from 21 per cent in April.

The CML also disclosed an increase in the number of loans approved to those buying a new home to 56,000 in July, up from 52,000 in June - although this remains significantly below long term averages.

Howard Archer, of economists Global Insight, said: “This mortgage data for July remains very low compared to long-term norms and does little to dilute suspicion that house prices will remain under pressure.

“It is also notable that mortgage approvals to first time buyers actually weakened in July, which suggests not only that they may be becoming more reluctant to move into the housing market in the current uncertain economic environment. It also suggests that first time buyers are finding it hard to get mortgages.”

Nicholas Leeming, of property website Zoopla.co.uk, said: “A crucial indicator of the health of the housing market is activity by first time buyers. The lack of attractive mortgage deals, combined with uncertainty around the economic impact of the government’s spending cuts affecting both lenders and borrowers, is seeing many frustrated first-time-buyers opt for renting in the short term.

“The mortgage market remains dominated by the cash-rich, with deposits on new homes increasing once again this month.”

High number of distress sales in Western Cape

The level of indebtedness in the Western Cape is the highest in SA and this is having an obvious and adverse impact on the property market in the province.

The latest Cape Metro FNB Property Barometer reveals that just over 15% of home sellers in the second quarter of 2010 sold because they were forced to do so by financial pressure or as a result of having their homes repossessed by a bank.

The 15,5% was some 3% higher than the number selling to upgrade their homes in the same quarter – a complete reversal from the situation in 2006 – 2007.

Clinton Martle, FNB Home Loans’ regional sales manager for the Western Cape, says the Western Cape is believed to have the highest level of indebtedness, or a debt-to-disposable income ratio of 88%. Well lower in second place in Gauteng with a ratio of 88%.

“While the 15,5% is a big improvement on the figures for all four quarters of 2009 (where financial pressure caused up to 33,5% of all sales) it is still a cause for serious concern,” said Lanice Steward, managing director of the estate agency Anne Porter Knight Frank (APKF).

“This type of seller is often so desperate that they will take an unjustifiable drop in their price to get some cash in hand. This, of course, retards the growth in prices and the recovery of the housing sector generally.”

The latest review, said Steward, also indicates that only 6% of sellers are doing so now due to a relocation within South Africa. This, she said, indicates that new jobs are few and far between at the moment, “which is exactly what we would expect in a post-recession period”.

As many as 12% of sellers, however, she said, are moving to be closer to work or amenities, including schools.

“In the Greater Cape Town area, I would guess that up to 15% of those living in the Northern Suburbs and the popular fast growing areas of the West Coast are contemplating a move of this kind so as to be closer to the city.

This is because the commuting times at peak hour traffic have become intolerable. However, the problem may be alleviated by the introduction of the Integrated Rapid Transit System in 2011.”

“The good news is that this has come about because the Western Cape’s per capita income is the second highest in the country. However, an average debt level of 101% in relation to income, i.e. a debt level of just on a total of an individual’s annual earnings, will limit borrowers’ ability to get loans from the banks – who, by and large, like to see their mortgages awarded to those with little or no debts elsewhere.”

Martle says when it comes to indebtedness, it is difficult to say for sure as to how much the Western Cape’s high level of estimated debt-to-disposable income ratio is due to its high property values. “Nevertheless, I think it must have some effect.

But it is also difficult to ascertain what level of indebtedness means trouble.”
“What we do know, however, it that during the last interest rate hiking cycle, which wasn’t extreme by our historic standards, SA’s level of indebtedness caused a high degree of pain in terms of bad debts.

With the Western Cape being on the high end of the indebtedness caused a high degree of pain in terms of bad debts. With the Western Cape being on the high end of the indebtedness spectrum, therefore, one can’t help but feel that we are vulnerable to nasty surprises such as interest rate hikes and economic downturns,” he said.

Many leaders in the property sector, said Steward, have been campaigning for an easing of the National Credit Act (NCA) criteria. She, however, does not go along with them.

“If well applied, the Act does protect the purchaser in the long term. What really needs to be looked at are the onerous lending criteria applied to self-employed buyers. Although many have been forced into becoming self-employed they have become very successful and are entrepreneurial – exactly the type that South Africa needs right now.”

In most cases, added Steward, the FNB Property Barometer shows that the higher the earnings, the larger the debt incurred. People earning above R750k per annum, she said, have an average debt in relation to income of 156% - over 50% higher than the average for the Western Cape. Under the NCA rules, this makes it very hard for them to qualify for a bond of the size they would probably feel necessary.

Martle concluded by saying that “if you are not on the housing ladder, now may be a good opportunity to get on”. “However, I continue to urge people to buy well-within their means, bearing in mind that interest rates ultimately do rise, not to mention huge electricity and possibly other utilities tariff hikes to come.” – Eugene Brink

Buy-to-let still in the doldrums

Total property buying remained unchanged from the previous quarter, at its record low point of 7%

According to the FNB Estate Agent Survey for the 3RD quarter of 2010, buy-to-let buying expressed as a percentage of total property buying remained unchanged from the previous quarter, at its record low point of 7%

Along with this weak survey reading, agent confidence in the near term prospects for this segment of the property market deteriorated further in the quarter.

After some mildly encouraging signs a quarter ago that the fundamentals behind buy-to-let buying were starting to improve, more recently there are hints that progress has stalled। Agents pointed to a virtually unchanged average gross yield on rental properties of 8% in the 3rd quarter, which is insignificantly lower than the 7.9% of the previous quarter.

However, this comes after two preceding quarters of significant rise in average yield, and while it could be the lagged result of accelerating house price growth prior to mid-year, it would also appear that the rental market remains mediocre.

As at the final quarter of 2010, Rode's flat rental data showed a return to low positive year-onyear rental inflation, but the 1st quarter of 2010 had shown no improvement on that। CPI data, which records actual rental paid (i.e. the combination of the impact of market rentals and escalations), continues to show a declining trend in overall home rental inflation, with the July year-on-year growth rate being a weak 4.5%.

In the mean time, household sector indebtedness remains high, and 2nd quarter economic growth estimates confirm what the SARB Leading Indicator has been showing for some time, i।e. that economic growth has started to soften.

Slowing economic growth can place pressure on household disposable income growth, and thus on potential buy-to-let buying power

Some mildly positive news for the buy-to-let market has surfaced over the past quarter, however, from TPN, whose report on rental tenants has shown an improvement in the average percentage of tenants that are " in good standing" with their landlords. From 79% in the previous quarter, the percentage of total tenants on the TPN system that are in good standing regarding rental payments rose to 82% in the 2nd quarter, according to the latest TPN report.

This is further improvement in an upward trend spanning from the 1st quarter of 2009, at which time this percentage reached a lowly 71%. The improvement has arguably come largely as a result of a far lower interest rate environment since 2008, which can even assist rental tenants, who may have significant levels of debt elsewhere.

However, the improvement in the average performance of tenants has been insufficient to serve as a strong boost to the rental market to date, it would seem.

So, while capital growth on property is uninspiring to those would-be buy-to-let investors who focus more on that, yields are un-enticing for the investor focused on a rental income stream, and so the long wait for an improved buy-to-let market continues.

For the time being, though, many estate agents appear to have given up the wait in the sense that the survey shows a steady deterioration in their near term future expectations of buy-to-let buying.

In the FNB Estate Agent Survey, we ask agents for their expectations regarding the near term expectation for the buy-to-let market, i।e. do they expect strengthening (a rating of 1), weakening (a rating of -1) or unchanged demand (a rating of zero).

We combine their ratings into an index, which runs on a scale from 1 (most optimistic) to -1 (most pessimistic).

For 4 consecutive quarters, we have seen a steady decline in the FNB Buy-to-let Confidence Indicator, from a 3rd quarter 2009 revised high of 0.149 down to a 3rd quarter 2010 level of 0.014.

Don't fight the interest rate gap - Berry Everitt

Property experts are arguing against such a move।

There has been some debate again of late about whether the fixed difference between the repo rate and the prime rate of interest is too large at 3,5 percentage points, and whether government should move to shrink it, but property experts are arguing against such a move।

The difference means that with the 50 basis point decline in the repo rate this week, the prime rate will drop to 9,5%, the lowest level it has reached in almost 30 years।

"The 3,5% is the difference between what banks must pay to borrow money and what they charge consumers to borrow from them," notes Berry Everitt, CEO of the Chas Everitt International property group, "and there are many who think this margin is too big at a time when most consumers are still heavily in debt and battling to make ends meet।

"However, there are several other important factors to consider, the first being that banks have to put a percentage of every loan extended into their reserve funds, which cuts into their profits but provides a prudent hedge against bad debt।

"Banking legislation has seen this reserve requirement increased in recent years and thank goodness, because it enabled the banks to be much more accommodating towards borrowers in distress and default during the recent economic downturn than was possible in the late 1990s, for instance, when soaring interest rates resulted in thousands of people losing their homes."
What is more, he says the banks have only recently begun to show more confidence in lending again, "and that should not be discouraged in any way as it is critical to the full recovery of the property market in particular and the economy in general"।

Thirdly, Everitt says, those calling for the differential between the repo and prime rates to be cut should also consider the many, mostly elderly people whose only income is the interest on their savings।

"Their incomes have been eroded considerably by the eight interest rate decreases since December 2008 and would no doubt fall further if the banks' 3,5% margin were to be decreased।"

*Berry Everitt is the CEO of the Chas Everitt International property group.

Thursday, 9 September 2010

SARB cuts interest rates to prime 9.5%

The South African Reserve Bank's monetary policy committee cut the key repo rate by half a percentage point on Thursday.

The new repo rate is 6%, with the prime lending rate to change 9,5%

The repo rate is the rate at which the central bank lends to other banks, while the prime lending rate is the benchmark rate at which banks lend to customers. The decision to cut rates had been expected

Most economists have argued for a rate cut to boost the economy in the wake of a favourable inflation outlook, as well as slower gross domestic product growth figures and factory data.

The July rate of change in the consumer price index (CPI) came in at 3.7% from 4.2% in June. On Wednesday, Statistics SA reported annual manufacturing production growth of 7.5%, well down on June's growth rate of 9.3%.

Bank governor Gill Marcus said the MPC views the decision to be consistent with the continued attainment of the inflation target, having given due regard to the risks in the outlook."The scope for further downward movement is seen to be limited, but this will be assessed on an ongoing basis. Our approach remains forward-looking and is informed by close examination of the data and future developments," she said.

Reacting to the MPC's decision, chairperson of the National Consumer Forum said: "I think this is something consumers are going to welcome as they've also recently had a drop in the price of petrol. They should use this opportunity to pay off their debts."

Efficient Financial Holdings economist Freddie Mitchell said: "The cut was not surprising at all given the data out of the second quarter. Like the Governor said, the scope for interest rate cuts is getting narrower, I don't thing we'll see another cut this year."