Rolling with the punches......

A few months ago the subject of property was the latest buzzword around any braai or lunchtime table. Every person from the local dominee to the gardener wanted to get on into the action & when this was before the New Credit ACT (NCA) many people did.

But then ask yourself the question: When the gardener has 5 properties & he gives you advice on how to sublet your flat in Clifton, shouldn’t you think twice?

And then out of the blue, the NCA is introduced, bank credit dries up & invariably property growth goes into decline. Couple this with an increase in interest rates by a staggering 30% with rental income remaining constant, and you suddenly have a situation where buy-to-let has swine flu & you cannot get rid of it soon enough. And to top it all, we currently sit in a recession which is like the Boks losing to England………it affect all of us!!

So who in their right mind is going to look at property when they’re living day to day?

Here’s some food for thought on why real investors would consider buying in a tough market:

1) In property, you make your money when you buy:

The whole point of property is to buy so that your rental income covers the mortgage pay. And where does the rental income come from? The tenant! So look at what your tenant wants first, then go out and buy the property. You wouldn’t buy a property in De Aar & then expect tenants to fall over themselves wanting to sign the rental contract. (No offence to the people from De Aar, but rental demand might prove to be a little stronger in Joburg or Cape Town)

2) More interest rate reductions, more breathing space for the Landlord:

Since December 08, there has been a cumulative decrease of 4.5% in the interest rates. On a R1m property, this decrease is a saving of more than three thousand Rand per month! So more cash for the owner, means less chance of having to increase the rent which in turn decreases the chances of the tenant of leaving.

3) Property is a good investment – if you have the patience for it:

My personal strategy is to buy property, and never sell. The reason for this is the replacement cost of selling and then having to buy a similar or better property is very rarely achieved. You also have to factor in capital gains tax when you sell & if SARS decides you were speculating, you have to hand over 40% of what you made from the transaction. Building Materials & Labour also keep increasing, so an equivalent property will only get smaller, thereby decreasing the rental which in turn affects your bottom line.

4) Bargain, Bargain, Bargain – but do your homework:

Just because there are more people wanting to sell their properties, doesn’t mean that anything you buy now will net you millions. Markets are imperfect things & due to the flow of information, there is still a competitive advantage of one party over another. So just as word of warning, when supply far outweighs demand, remember to do the calculation ! Does the rent cover the mortgage? No. So move on to the next one.

5) In the long run, property will outperform all other assets:

59% of the world’s wealth is held in property. When Ray A Croc, the owner of McDonalds was asked what business he was in, he didn’t reply with the ‘burger business’. He just smiled and said the ‘property business’. So maybe (and I’m just throwing it out there J), if you stick to property it might not be as easy as selling shares, but at least you know that the chances of a receiving a steady stream of passive income, looks a whole lot better.

So in keeping in mind the points mentioned, remember the words of Warren Buffett, the most successful private investor in the World:

Put your eggs in one basket, watch that basket closely !!

The Light at the end of the Tunnel, may be the light of an oncoming Train

Do you want the good news or bad news first?

Let’s start with the good news so as to soften the blow when it comes to telling you the bad news:

The Good News

Our April elections were judged to be free, fair & but above all, ‘incident’ free. We were praised internationally of being an example to not only Africa, but to the rest of the world as well. (Hats off to all :)

Our beloved Tito decreased the interest rates by yet another 1%, bringing the prime rate to 12%. It’s forecasted that another 1.5% will be cut before the end of the year thereby making the total decrease since December last year a whopping 3.5% !! (We want more – We want more !!)

More than 1.8 million tickets have been requested for the 2010 Soccer World Cup. Applications came from more than 200 countries with the leading countries being South Africa, USA, United Kingdom & Germany :)

The Bad News

FNB’s house price index reports that the annual property growth sits at an eye watering -7.8%. So over the period of only 1 year, you’ve lost almost 8% on the value of your house (Bring on the waterworks……… L)

Even with Tito’s gift of reducing interest rates, the consumer debt ratio still stands at 75% (So for every paycheck you get, you pay 75% to debt…..and that’s AFTER tax!!)

Economists predict a bloodbath of job losses totalling almost 300 000 by the end of the year, especially in the automotive & mining sectors (This is particularly bad as it affects our biggest exports, namely gold and platinum)

The ‘Guess’

As for my ‘calculated’ guess for when all this pain will go away, I would say the middle of next year. My reasons for this are simple:

- Sentiment on the global recession will improve due to successful ‘recession proof’ policies implemented this year, coupled with the affects of our local interest rate reductions.

- Together with the international exposure of hosting a successful World Cup, our commercial banks will slowly reduce lending criteria, thereby kick-starting the property market once again.

As for Today: Always remember, the harder the rain, the better the sunshine.