Friday, 25 February 2011

Property transfer threshold raised

The decision to raise the threshold at which transfer duty becomes payable from R500 000 to R600 000 is welcome news for the property industry, an estate agency head said on Wednesday.

Lew Geffen, chairman of Sotheby's International Realty, said the increase announced by Finance Minister Pravin Gordhan in his 2011 Budget will give many more people the opportunity to become home owners and get on the path to wealth creation.

Herschel Jawitz, CEO of Jawitz Properties, said the increase in the threshold means that for a property of R600 000 and higher, the transfer duty saving will be R5 000. “For first-time buyers this is a meaningful amount of money.”

This is a clear indication, said Jawitz, that government is aware of the issue of homeownership, especially for first-time buyers.

“The move is a surprise given that property prices have not really increased to the degree that would necessitate an inflationary increase in the threshold.

“With regard to the overall budget, allocations to the areas that directly impact on property values such as policing and road infrastructure are very positive,” Jawitz said.

Dr Andrew Golding, CE of the Pam Golding Property group, said that while they welcome the increase in the transfer duty threshold, they had hoped it would be a more significant increase.

This, he said, is given the fact that aspiring home owners are faced with numerous costs when acquiring a home, including ever-increasing rates and electricity tariffs.

“We do welcome, however, the announcement that government will explore an incentivised savings scheme for first-time home buyers, and look forward to further details regarding this,” he said.

“On our wish-list for this year’s Budget was for mortgage payments to be tax deductible for home owners, as is the case in some overseas countries and perhaps this could be considered for first-time buyers,” Dr Golding said.

Young Carr, CEO of Aida National Franchises, said the change in the transfer duty threshold will “especially help low income buyers to acquire their own homes”.

Carr said they were pleased with the R122bn allocation for the provision and improvement of housing, water and community amenities this year, and the announcement that government is to spend more than R21bn over the next three years upgrading around 400 000 homes in informal settlements.

"In our opinion, decent housing is just as important as decent jobs to give the young people of South Africahope in the future,” he said.

First time buyers returning to property market

And are currently responsible for almost half of all home loan applications.

First time buyers are making a steady return to the residential property market in South Africa, according to new statistics, which show that they are currently responsible for almost half of all home loan applications.

The research by ooba - South Africa's leading bond originator - has revealed that in 2010 the proportion of first time buyers as a percentage of total applications increased to 47.61%. This is the highest total since ooba began tracking the statistics, and is a 15.96% increase on the proportion of first time buyers since these records began in July 2005.

The change in profile of home buyers would signify a positive development for the local housing market. Higher levels of activity amongst first time buyers are generally a positive indicator for the housing market, as demand increases and there are positive knock-on effects.

A factor in the increased proportion of first time buyers would be the reduction in the number of property investors. With capital growth having curtailed, and buy-to-let investors having fallen away considerably, the relative proportion of first time buyers would naturally increase.

Further, as lending and economic conditions have been tough, existing homeowners have tended to hold on to their properties and renovate rather than trade up.

The reduction in interest rates of 650 basis points since 2008 would also have been a contributing factor to the increase in first time homebuyers. With rates now standing at a 30 year low, improved affordability has enabled many would-be homeowners to take the leap, as the cost of servicing a bond has reduced considerably.

This, combined with the easing in lending conditions, relatively low property price growth compared with recent years, low inflation rates and some real wage growth, combine to make this a favourable environment for the first time buyer to get onto the property ladder.

Possible first time buyers should aim to put down a deposit as those who do so are more likely to get their home loan approved and also obtain a more favourable interest rate on their bond. Homebuyers with a deposit have a much greater chance of home loan approval at favourable interest rates.

Asian Property surges 59%

A massive $63-billion was spent on property transactions in Asia last year, a 59 percent rise from 2009, as the region's economies led the recovery from the global financial crisis, a report said.

Surging prices in Hong Kong and Tokyo made up almost half the total amount spent, according to the study, which comes as several Asian countries grow concerned that large inflows of foreign cash are causing asset bubbles.

The figures, from real estate consultancy CB Richard Ellis, are a huge increase from the $39.2 billion spent in 2009, when the globe's worst economic crisis since the Great Depression sent property prices sliding.

"The Asian real estate investment market enjoyed an encouraging end to the year and prices for prime investment property have now recovered substantially," said Nick Axford, the consultancy's head of research for the Asia-Pacific area.

"The market outlook remains generally optimistic," he added.

Hong Kong accounted for $15.2 billion of the total, while Japan's market saw $14.2 billion in transactions.

Prices in Hong Kong have jumped 50 percent in the past two years due to low interest rates, a strong economy and an influx of mainland buyers who make up a big proportion of purchases, especially of luxury homes.

Worries about a property bubble have prompted Hong Kong's government to announce a series of measures to cool the market, including boosting land supply and new stamp duties to keep out so-called hot money.

Asian economies have outperformed their Western counterparts in recovering from the global economic slump that started in late 2008, with cash-rich foreign investors and low interest rates stoking demand for Asian properties.

"We expect that levels of activity will increase in 2011 as both foreign and domestic investors tap into the growing pool of capital looking to secure or increase its presence in Asia," said Greg Penn, the firm's executive director of investment properties for Asia.

In 2010, investors were especially drawn to office and retail space, which accounted for $26.3 billion and $10.4 billion in transactions respectively, said CB Richard Ellis' Asia Investment MarketView report for the second half of 2010.

Activity slowed in most markets during the last three months of the year except in mainland China, Malaysia and Singapore, which notched up a quarterly record as the city state saw more than $5 billion in transactions, it said.

Transactions by institutional investors touched $13 billion in 2010, a 74 percent year-on-year increase, while investment by Asian real estate investment trusts skyrocketed 195 percent to $10.5 billion, the consultancy said.

Cross-border property investment also picked up last year, accounting for $11 billion of total transaction volumes, a 96 percent year-on-year increase but still off a 2007 peak of $27 billion, it said.

Thursday, 17 February 2011

The best Mortgages for First-Time Buyers

We asked the experts for the best deals on the market for those looking to get on the property ladder.

Melanie Bien, director of independent mortgage broker Private Finance

"If you don't mind a new-build home, a number of developers are offering incentives and mortgages at higher LTVs than you could normally achieve. Taylor Wimpey has teamed up with Melton Mowbray and Saffron building societies to offer a 95 per cent LTV deal fixed at 2 years from 5.49 to 5.99 per cent.

"But while that is not a bad rate for this level of borrowing, fixing for such a short time is risky in a volatile housing market in which interest rates look set to rise sooner rather than later.

"Bovis has linked up with Woolwich to offer 90 per cent LTV mortgages at competitive rates with an insurance policy paid for by the developer to protect the lender in case of default, while Barratt has teamed up with Hitachi Capital to offer parents a £50,000 loan to help their child with the deposit.

"More conventional schemes, which don't require you to buy a new-build home include Lloyds' Lend A Hand. The child puts down just a 5 per cent deposit while the parents commit the equivalent of 20 per cent of the purchase price in savings in a Lloyds account. The child then pays the sort of rate normally only accessible on a 75 per cent LTV deal, making it much more affordable."

David Hollingworth, London & Country

The Mortgage Works has launched some specific guarantor products – for example they have a 3 year fixed rate at 4.99% with a 1% fee to 85% LTV.

Any new innovations that lenders have tried to pull together to assist first time buyers will usually draw in some way on parental assets.

For example, the Lloyds Lend a Hand scheme offers up to 95% LTV to the child but on the condition that parents put an additional 20% in a separate savings.

The lender has a charge over the savings although this can be released at the end of the fixed rate bond period subject to the LTV improving adequately. The benefit of this is that the child can get a higher LTV and the parent retains the savings in their own name rather than having to gift them to the child. What it doesn’t get round is the need for a large amount of cash to put into the transaction.

A solution from National Counties BS looks to provide an alternative working on similar lines but avoiding the need for substantial cash sums by using spare equity in the parental home as additional security.

The Family First Guarantor mortgage offers a fixed rate at 4.99% until 30/11/13 up to 95% LTV (with additional security) with a £495 fee. Bath BS also offers a similar idea with its Parental Assisted Mortgage.

Developers keen to shift their stock have been particularly keen to look at new options. Barratt recently launched an unsecured loan offering for parents looking to provide a deposit to their children. Taylor Wimpey has today been reported to be hooking up with some local building societies to offer 95% mortgages on specific developments.

The Slow Affordability adjustment continues

As the residential market stays on the weaker side of the economic spectrum.

The FNB Quarterly Housing Review focuses on the key issue of housing affordability, and why residential demand has not grown significantly despite a very significant improvement in the two "traditional" calculations of affordability that are used.

These measures are the average house price/average remuneration ratio and the installment value on a 100% loan on an average priced house/average remuneration ratio. Both of the indices reflecting these ratios have fallen (improved) dramatically since their peaks in 2007/8, the price/average remuneration ratio by -22% and the installment/average remuneration ratio by -40.4%, with interest rates providing additional downward impetus for the latter ratio.

However, these dramatically improved trends run contradictory to our FNB Estate Agent Survey results where an increasing percentage of agents (57% by the 4th quarter of 2010) are stating that income levels have got "far behind home price levels". Despite the estate agent survey question requiring only a subjective and qualitative answer, our feeling is that their answer is far closer to the mark than calculations using average price and average remuneration.

This is in part because of the major decline in formal sector employment from 2008-early-2010, according to the SARB as much as -15.4% over the period. Therefore, the average income earner may be fine, but formal income earners are significantly less in number compared with a few years ago.

However, the issue is more complex than that, because the question has arisen as to how come the likes of new motor vehicle growth far outstrips new home sales (and thus new residential building activity growth)? The motor vehicle sector operates in the same economy as the home market, and is also affected by issues such as recession and job loss. But new motor vehicle sales growth was robust through 2010 to early-2011 (as were retail sales), while the also interest rate-driven new housing demand (and thus building activity) remains virtually in freefall.

Here, the concept of "relative affordability" comes into play to partly explain the differing performances. During the last decade, prior to the recession, both the housing market and the vehicle market had huge demand booms, driven largely by a dramatic reduction in the cost of credit, a healthy economic and household income growth rate, and a far lower household sector level of indebtedness than today.

However, the boom time rate of increase in house prices far outstripped that of vehicle sales due to a far greater limit in the supply of new homes to the market. The more severe supply constraint in the housing market is due to building sector constraints, whereas vehicles can be imported rapidly rendering the supply thereof virtually unlimited for a small economy such as our own.

The result was that house affordability (price relative to income/remuneration) deteriorated far worse during the boom than was the case for motor vehicles, with vehicle affordability actually improving over the whole decade. This relative affordability deterioration in housing alone must surely have an impact on the relative performances of housing demand versus vehicle demand.

However, the possible reasons go even further. While many people think of home ownership as an essential item, the reality is that for the middle class it is not always essential in the short term. Or, at least, it is not always as essential as vehicles. By this we mean that would-be new entrants to the home market can often rent, or alternatively, delay their entry into property by remaining in their parents home for longer than perhaps originally planned.

Mobility, however, is extremely important in the middle to upper income job market, and good public transport is not yet a reality. Private vehicles are thus arguably a more essential middle class item than owning a home.

Motor vehicles also have a shorter lifecycle than houses, meaning a shorter time to replacement. Therefore, one would expect this, too, to cause a more prompt recovery in vehicle demand once economic conditions improve or interest rates fall.

Back to affordability issues, and one must not rule out the impact of rates and utilities tariffs related to housing. These have climbed steeply in recent times, and the multi-year Eskom tariff hikes mean more of the same in 2011 and 2012, outstripping private vehicle related cost increases. Electricity tariff hikes are most prominent in this regard, but assessment rates and water are not far behind.

Finally, with regard to access to finance, it probably wouldn't even be necessary for home loans banks to have tighter credit criteria than vehicle financiers in order to have a bigger negative impact on their market. The large value of a home purchase relative to car purchases (on average) mean that a 10% hypothetical deposit on a motor vehicle purchase would be manageable for more people than a 10% deposit on a house.

Therefore, SA's severe lack of savings militates far more against a big ticket item such as a home purchase than against items where smaller loans are required.

So, the affordability deterioration of housing relative to both vehicles and overall consumer goods and services (including the relative affordability deterioration contribution of big rates and tariff hikes), over the last decade as a whole, should imply the need for the household sector to re-balance its expenditure basket by reducing the portion spent on housing relative to other items. Many would-be new entrants can do this in the short term, due to the less essential nature of middle class home ownership relative to reliable motor vehicles.

Hence, the ongoing decline in new residential building completions in 2010 in stark contrast to sharp growth in new motor vehicle sales. This re-balancing of the household sector expenditure portfolio, along with very weak job creation further hampering new entries to a market that still appears to be oversupplied, and given our expectation of no further interest rate cuts in 2011, leads us to the expectation of mild average house price deflation in 2011. We pencil in an FNB House Price Index decline of around -1%.

While there are no obvious indications of any significant stimulus for the market in 2011, at this stage there are fortunately no obvious indications of any sharp shock to the market either, just a very "flat" and unexciting year. Any "unexpected" shocks to upset the apple cart would probably emanate from foreign sources.

What happens to the US economy after their huge stimulus measures wear off? Do capital inflows into SA reverse sharply, causing a sharp currency weakening and an inflation surge? Do global food and oil prices "spike" again? For the time being, though, the 2011 environment appears fairly benign, but with gradually increasing upward pressure on inflation, which in turn is expected to lead to interest rate hikes from early 2012.