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Friday, 12 November 2010

Buy a house – but how?

If you buy a house that has been lived in for a number of years it will cost you about 30% less than if you buy a brand new place that has never been occupied before according to figures released by First National Bank last week.

That got me thinking about the high cost of building and the more research I did – and the more thinking I did too – the angrier I became. Angry because building materials suppliers and property developers are ripping off the South African consumers.

A brand new ‘affordable’ apartment of 30 sqm costs around R300k in different parts of South Africa. It can be considerably more if you’re buying something in Clifton or Camps Bay but the average cost per square metre for an ‘affordable’ property in reasonable suburbs (including Mitchell’s Plain or Cosmo City) is around 10k per square metre.

Talk to the developers and they say the high costs of developing a site, combined with the high costs of labour and materials determine the price of the property when it is released onto the market.

All the developers are really quick to claim that the profit levels are minimal particularly when the money is tied up for so long before the first unit is sold. So if they’re not making good profits, why are they doing it?

The answer is actually that they are making huge profits and they’re just fudging their answers to dissuade me (and you) that they’re making lots and lots of bucks.
Much the same pattern applies to material suppliers. These organisations blame everybody else except themselves for the exorbitant prices of cement, bricks, plaster, tiles, fixtures and fittings and even glass.

The manufacturers and suppliers point fingers at the retailers claiming that they are the ones who are keeping prices high; then they point another set of fingers at the high costs of transporting their products from the factory to the site (or the retail outlet). They even blame the low productivity of workers for the high prices of products made for the building industry.

Do they blame themselves or do they reduce their margins? Not a chance. In fact year after year your large material suppliers provide handsome dividends for their shareholders. So, like developers, they too are making money – and lots of it.

The final culprit in this rather depressing cycle of profiteering is the banks themselves. You see it’s the banks that are prepared to fund the developers and then grant the bonds for each pokey little flat measuring five metres by six metres into which has been crammed a kitchen and bathroom too.

Recently, Human Settlements Minister Tokyo Sexwale urged developers, material suppliers, architects and engineers to come up with innovative ways to resolve the housing problems that face South Africa.

Well, here’s a thought Mr Minister: how’s about getting the developers, the materials suppliers and the banks to stop profiteering. How’s about getting them to stop driving prices higher and higher?

How can we do that?

Well let’s look at the existing position first of all. One of the attractions for buying a new property – particularly for first-time homebuyers – is that a new property is free from transfer duty and, in many cases, first-time buyers even qualify for 100% bonds.

Sometimes buyers are supported by a developer who offers a cash-back advance to them if they sign the deal. In fact, on a 140 sqm house costing R1,4-million I was offered a R50k cash-back (to spend on new furniture or other things I was told) if I agreed to buy the home.

If I was prepared to buy a slightly bigger place, costing R1,6-million then I’d get R100k cash-back advance. Sign the deal, get the money and spend it on a new plasma TV for the lounge, curtains for all the bedrooms, new furniture for all the rooms, buy some new appliances and so on. Even spend it on having a holiday after all the stresses of moving if I choose to.

And developers tell me that they’re not making handsome profits. Pull the other leg Mr and Mrs Property Developer.

Do you ever hear about a cash-back advance on the sale of an older property? Do you get any relief on transfer duties, bond costs, legal fees or any of the other charges that are added to a property transaction? You don’t even get a discount on stamp duty.

So what we know, clearly, is that the deposit, the transfer fees and the other charges make older properties unaffordable for first-time buyers unless they have a large amount of cash in their pockets to spend on the property.

So the stumbling block that’s preventing sales of second-hand homes is the additional costs that must be covered. That being the case, Mr Minister, why don’t you and your advisers come up with a way to reduce those costs or at least make them affordable for many millions of South Africans?
Of course the argument is that developers are paying Value Added Tax on the materials they buy and because of the VAT the property doesn’t attract transfer duties.

So what about a VAT amount that gets included in the sales price of older properties (and therefore is included in the price) instead of transfer duties.

That way people could get a bond (including VAT) for the second-hand property they want to own and not pay any transfer costs at all. Sure, they’d have to cover the legal fees to feed the ever-hungry attorneys that do all the paperwork but those costs are relatively small compared with the many other charges.

Perhaps there are other ways that you, Mr Minister, can come up with to resolve the sales of property in the second-hand market and I think that there are many possible solutions too. But the reality is that the problem of transfer fees, deposits and other costs must be addressed.

More importantly than that, though, is that if you re-energise the second-hand property market the bottom will fall out of the market for new properties. Particularly so if banks come to this party and provide the bond finance required to buy older properties.

If that happened, the price of new homes would plummet.

And, if developers stop developing new properties, the materials suppliers would find that their sales levels fell sharply and they’d be forced to do something about their prices too. Like a pack of cards, the materials prices would come tumbling down too.

And so the entire cycle for reducing costs would start to work: Materials prices fall; new property prices drop correspondingly and stay there until new buyers come into the market and start buying properties that are actually affordable.

But to claim, as developers do right now, that a pokey little apartment costing R10k per square metre in a distant suburb far is ‘affordable’ is nonsense.

If you ask me, affordable is about half of that?

*Hartdegen writes a regular column for Property24.com. The content of his columns constitutes his personal opinion and doesn’t pretend to be facts or advice.

7 comments:

Alistair said...

Is it possible that if these developers stopped loading the sale price of the new unit. To give you that little under the table cash back and the transfer fees then new property would be even cheeper. Loading the purchace price with your green backs is worse than profiteering its over capitalising the property at the get go, making it that much more expensive when it changes hands?

Eric S Doms said...

Alistair

Developers don't give out cash, banks do.

Therefore, I don't think it's down to the Developer to provide buyers with rental guarantees or 'Under the table cash back', it's down to the banks to stem the flow of cash that is given to Developers.

All in all, consider both existing and offplan properties as both have their advantages & disadvantages.

What you have to decide is which one option is best for you.

Sucker Jack said...

Nice write-up Eric. It's all especially true with regards to the nature of purchasing property these days. Going back 30 years, if you bought a house as a first time buyer, it would be a simple house in a simple suburb. You were looking at land of 800 - 1000 m/2 with a normal house on there which you enhanced and built up over time, most people lived there their whole lives and raised their kids in the same house. These days, due to the extensive climb in property prices people cannot afford those huge properties on the go. They have to purchase sectional title to start off, and then "climb the ladder", so to speak. It's really the only way. The larger properties cost in excess of 2 bar, which can require at least a R500 000 deposit. Not many FSBs can save up half a million. Which brings us to your point, Transfer Duty and Conveyancing Fees. Something needs to be adjusted here if SA ever wishes to see a recovery in the market. A young couple starting off today is looking at buying up to 3 or 4 properties as they climb the ladder to a decent house, but it's these costs that are preventing them from doing so.

Sucker Jack said...

To add some examples, this is taken from Ooba's transfer duty calculator. Your average house in Cape Town in a decent suburb sits between 1.5 - 2.5 million ... so:

1.5 bar = R103 000 in fees
2 bar = R148 000 in fees
2.5 bar = R193 000 in fees

The above figues include bond and transfer fees bonded at 100% of the purchase price.

Eric S Doms said...

@ Sucker Jack

Good points !

Although, the point you make regarding the purchase price the buying costs involved is not only a South African phenomenon.

In the UK the gap is way bigger with a 90% mortgage only getting you a variable rate of 4.29%. That is a 3.8% difference between repo and prime ! You then have conveyance fees & stamp duty to budget for....

I think all this are hangovers from the recession & believe that these times will be with us for a while to come.

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