Friday, 26 August 2011

Global house prices continue to fall

Global house prices increased by only 1.8 percent in the year to March, the lowest annual rate of growth recorded since Q4 2009.

Pam Golding Properties reports that Cape Town's Atlantic Seaboard area including City Bowl, remains relatively recession-proof.

According to the Knight Frank Global House Price Index Q1 2011, in regional terms, Asia remains the top performing continent recording 8.4 percent growth over the last 12 months. This is down from 17.8 percent a year earlier.

Liam Bailey, head of residential research at Knight Frank told Property24 that overall, price growth for the countries tracked within the index has remained in positive territory since Q4 2009.

This he says has been largely as a result of the Asian housing market boom, which led in some cases to annual price inflation of between 30 and 40 percent in locations such as Hong Kong and Singapore.

“The anti-inflationary measures taken by Asian governments to cool their overheated housing markets in 2010 and 2011 have started to take effect and this has had a dampening effect on the index’s overall price growth,” says Bailey.

In Q1 2010, Singapore recorded annual price inflation of 24.1% and this fell to 10.5 percent in Q1 2011. House price growth in Hong Kong declined from 32.8 percent to 24.2 percent over the same period, he says.

Other strong performing countries where governments are fighting to pull inflationary pressures under control were India (21.9 percent) and Taiwan (14.3 percent).

The weakest region was North America which saw a fall of 0.4 percent in values in the year to Q1 2011.

House prices in South Africa fell by 1.3 percent in the year to March 2011 as recorded in the index. In March 2010, the average house price was R1 051 997 but by March 2011, this figure had fallen to R1 038 322. In the three months to March 2011, the average house price rose by 1.5 percent, explains Bailey.

Asked where the South African market is headed in the next few months to end of 2011, he says the market presents risks and opportunities.

Globally, sovereign debt concerns in US and Europe could weaken investor confidence. Secondly, interest rates in South Africa may have bottomed out and may start to rise in 2012.

“This could threaten first time buyer demand, which has been solid in recent months and an important driver of market activity.”

On opportunities, Bailey says there is growing evidence that an increasing number of homeowners are selling due to financial pressure and opting to rent. This move could boost supply and may attract more buy-to-let investors to the sales market.

“South Africa’s trade links with China (and other BRICs nations) have strengthened considerably in the past two years.”

This modern double-storey home in Mostertsdrift, Stellenbosch, is on the market exclusively through Pam Golding Properties, priced at R18.5 million. The home is set on 2000sqm, and was built in 2008. It offers six en-suite bedrooms.

According to the Department of Trade of Industry two-way trade between China and South Africa reached R119.7 billion in 2009. This means China surpassed the US as South Africa’s largest trading partner.

Bailey says the strongest performing housing markets have seen a convergence of factors such as high demand, constrained supply, significant wealth generation and benign economic conditions.

“Supply can be controlled but housing markets are also intrinsically linked to confidence.”

Government and monetary policy decisions such as maintaining interest rates at historical lows has helped to keep the momentum going in the western housing markets.

“We expect to see the current slowdown in global housing markets to continue, hitting a low point in Q4 2011 (assuming the Asian markets continue to cool and the government intervention is successful) but with a slow recovery in global house prices taking place in 2012,” adds Bailey.

Absa Home Loans property analyst, Jacques du Toit says the global housing market is very mixed. Some countries are showing growth while others are still under pressure.

“In South Africa, house price growth is very low at this stage largely as a result of the state of consumer finances,” says Du Toit.

He says household debt to disposable income is still relatively high at almost 77 percent. Many consumers are struggling with bad debt making it difficult for them to obtain credit.

Du Toit reckons the property market will continue to reflect economic and consumer finance conditions.

“I expect very low nominal price growth for 2011 with house prices expected to drop in real terms this year,” says Du Toit.

It appears that the global housing market continues to be somewhat in the doldrums and this seems likely to continue for the foreseeable future, says Dr Andrew Golding, chief executive officer of Pam Golding Properties.

Aerial view of Umhlanga coastline: Elwyn Schenk, Pam Golding Properties area principal in Umhlanga, KwaZulu-Natal says this market is resilient. Its wide appeal and strong commercial growth has attracted those moving in from other areas in the Durban surrounds. Home buyers are a mix of end users and investors across all sectors of the market.

“Our housing market started to turn down almost a year before the start of the global economic downturn and we have been in this down cycle for the best part of four years,” says Dr Golding.

He says the residential property market has held up relatively well from a pricing point of view with prices (generally) only between 10 and 20 percent down off the peak at the height of the cycle.

“The market remains subdued but resilient and this status quo is likely to remain for at least the rest of 2011 and possibly well into 2012.”

Dr Golding says they are seeing an increase in sales numbers and activity levels but the upward trend is slow rather than a rapid recovery.

He adds that key to the faster improvement in the residential market will be a relaxation of the current stringent bank lending criteria. – Denise Mhlanga

Thursday, 11 August 2011

How to manage Property Cycles anywhere in the World

The dizzying heights of the most recent property boom, when house price growth peaked at an average annual rate of 32% in 2004, as well as the protracted recovery period in which the property industry has been languishing since late 2009, are prime examples of fluctuations that obscure the otherwise clear cyclical movements in the property industry.

One of the fundamental basics of economics is that markets move in cycles. Markets experience boom times, followed by a period of market correction and a downturn, before the next boom arrives. This is a natural phenomenon evident in all markets, and whether it is called "boom and bust", "bulls or bears" or simply "peaks and troughs", investors can be absolutely certain that neither a growth period nor a downturn in any market will last forever.

What was uncertain, however, was the highs or lows that may be reached during an upturn or a downturn, and the duration of either.

"In the property industry in SA, the average cycle normally spans around seven years," says Dr Koos du Toit, CEO of the P3 Investment Group.

"But given the heady heights reached in 2004, when many analysts and experts warned of a 'property bubble', as well as the subsequent economic turmoil as the world experienced the worst recession in living memory, it is not surprising that many have lost sight of the fact that we are simply moving through another cycle.

"Yes, the market correction and downturn of this property cycle were nothing short of terrifying for speculators and those investors who had overextended themselves financially. And the long, slow recovery has been painful for even the most prudent investors. But the cycle is turning, as it always does, and the market will again experience an upturn.

"What remained uncertain wass when the upturn will commence - many predict only towards the end of 2012; what level property price inflation will reach before the next market correction; and how long the upturn will last."

The question arises: How can a property investor protect a portfolio against the ravages of the property cycle?

"Many property investors do attempt to 'time' the market, but this is akin to speculation. The 2004 boom and this long, protracted recovery provide ample proof that 'timing' the market can be a dangerous game," comments Du Toit.

"Professional - and thus successful - property investors take a long-term view of their investment and the market. They don't speculate; they are building sustainable property investment businesses. This includes keeping an eye on the property cycle, but their focus is not on 'timing' the market, but rather finding the right investment properties that will yield an ongoing passive income and capital growth over the long term. Seasoned and professional property investors know that these investment properties can be found regardless of where we are in the property cycle."

Du Toit explained that professional property investors did not simply acquire properties, they acquired property assets with long-term income-generating potential.

"In layman's terms, this approach can be compared to buying a cow. You can either keep the cow for milking over the long term, or you can sell it quickly at the highest price for slaughtering. If you acquire a cow for milking, you will have an asset, which is appreciating in value, and you will benefit from the milk it produces on an ongoing basis for years to come. If you sell the cow for slaughtering, you might make a quick 'killing' - to use the terminology speculators are fond of. But you may not, particularly if several other cow owners have the same idea. Either way, both the cow, as an asset, and the milk it would have produced over the long term, are gone."

Du Toit notes that a property should be acquired as a cash cow.

"The intention is to hold the property over the long term, milking its ability to produce a passive monthly income that keeps pace with inflation year after year.

"While the property will also appreciate in value, this is regarded as an added bonus, since the objective is not to sell the cash cow, but rather to milk it. This approach is almost immune to the property cycles, since regardless of whether property prices are rising or falling, there will always be demand for good entry-level rental properties in well-established and growing areas.

"And while capital appreciation is not the main objective, investors are richly rewarded for their patience and long-term perspective by superior capital growth over the years, as the ups and downs average out, producing a steady upward trend in property price inflation."

This, clearly, was an entirely different approach when compared to speculating, in which property investors try to "time" the market by buying at high prices, and hope to "make a killing" by selling even higher in the short term.

Du Toit says that while fortunes have been made in this way, it is a high risk approach that has certainly seen many investors lose their investments, and has given many South Africans a distorted understanding of property investment.

"Property investment - acquiring property assets that can be 'milked' over the long term for their income-generating potential - may not be as thrilling and exciting as wheeling and dealing with properties, timing the market and making a killing.

"But it is a proven, tried-and-tested recipe for virtually failsafe property investment. And it is a system that allows investors to sleep peacefully at night, knowing that wherever we are in the property cycle, whatever highs or lows may be reached during an upturn or a downturn, or the duration thereof, their properties are generating an inflation-linked passive income, and in the long term, even their most optimistic capital appreciation expectations will be realised."

This article is to inform and educate, not to advise.