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

Buyers moving South

Cape residential property is about 25 percent to 30 percent more expensive than residential property in Gauteng; a fact, says Anton du Plessis, CEO of Vineyard Estates, that does not deter many Gauteng buyers from moving south, even though they may have to downscale quite appreciably to make such a move possible।

"Gauteng currently," said du Plessis recently on SABC’s Expresso Morning Show, "offers better value for money on plot sizes, floor areas and finishes but, of course, Cape Town has scenery, the sea, winelands and much else. If it is a lifestyle rather than financial reward that is now your priority, this is where you will probably find it."

Most upcountry buyers, he said, arrive in Cape Town with a set budget in mind. Once they discover that they cannot buy the lifestyle that they want, at the price they had anticipated, those buyers who can afford to raise their sights often do so.

"More often than not, a buyer from Gauteng who indicates a maximum spend of, say, R4-million initially will end up buying for R5-million and more."

The housing market in and around Johannesburg, said du Plessis, still has ample space at its disposal. Even in the built-up areas there is still huge scope for densification and redevelopment and whether the buyer looks north, south, east or west, land for expansion is not hard to find. In many Gauteng suburbs the problem lies not in a lack of subdivisions, but in the provision of services to accommodate the additional load.

"By contrast, the Cape Peninsula’s middle class suburbs have been crammed into the limited space between the mountain and the M5 freeway on the east and the mountain and the sea in most other areas.

"As the demand, however, is still strong, and the supply relatively limited, prices will inevitably be far higher than in equivalent sized homes in and around Johannesburg.

"Having said that," du Plessis added, "it is currently very much a buyers’ market and where sellers are distressed good properties can be snapped up for up to 25 percent less than their real value."

"This will not last forever. There are now signs that by the second half of 2012 (as I have said previously) today’s prices could look very low indeed."

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.

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.