Amid tough economic times and ongoing difficulty in obtaining mortgage finance, the importance of affordability in the housing market remains paramount.
Accessible pricing remains a major obstacle to many new entrants to the housing market, and is a crucial factor for many other buyer types, including those downscaling for retirement or wishing to upgrade to meet the needs of a growing family.
Yet affordable homes are not a myth, says Pam Golding Properties’ MD for the Western Cape metro region, Laurie Wener.
“There are a number of suburbs in the Cape Town metropolitan area where one can obtain decent, well-built homes in the R600k to R3m price range, ranging from compact apartments ideal for young couples and professionals, to larger free-standing homes. If one only knows where to look, one may be surprised by the value for money which can be obtained, and the large variety of stock which is currently on offer.”
Western Seaboard Cape Town’s Western Seaboard has long been a popular area for first-time buyers, young professionals and downscalers seeking compact, affordable homes which are easy to maintain.
In recent years as the residential area has expanded in size, so too has the offering of schools, shops, hospitals and other amenities, making these suburbs increasingly popular with young families as well.
PGP’s area manager, Ivan Swart, says there is a wide variety of affordable housing options to choose from in suburbs like Parklands, Sunningdale, Flamingo Vlei and Bloubergrant, as well as in the Melkbosstrand area further to the north.
These range from studio apartments to secure complexes and even free-standing homes. “Newer areas such as Big Bay and Atlantic Beach Golf Estate are growing rapidly in popularity with this segment of the market, and we continue to see a lot of offers from first-time buyers, older buyers downscaling for retirement, and young professional couples.
Unfortunately the limited access to mortgage finance remains an inhibiting factor, but the demand is certainly there.”
For R600k to R1m, one can obtain a two-bedroomed apartment, ideal for new entrants to the housing market and young couples. In the R1m to R2m price range, one can buy a sizable free-standing family home with three bedrooms and a double garage in Parklands, Sunningdale, Flamingo Vlei, Bloubergrant, or Melkbosstrand. This price bracket will also secure a starter home in the secure Atlantic Beach Golf Estate.
“For buyers in the R2m to R3m bracket there is even more choice, from a free-standing starter home in the Atlantic Beach or Sunset Links Golf Estates, Big Bay estates or Sunset Beach, to a two-bedroomed beachfront apartment, suited to those who are retiring or for those wanting a lock-up-and-go lifestyle.
We have a wide selection of stock in the latter category at present, with some excellent value for money on offer.”
South Peninsula
The towns of the South Peninsula also offer a number of options for buyers seeking property below R3m – and they often come with a view or even walking-distance access to the beachfront।
One can obtain a free-standing three-bedroomed home in Kommetjie for under R2m, or a cottage in Scarborough for R1,25m.
PGP’s area manager Sandi Gildenhuys says there are also a number of homes in this price range in Fish Hoek. “One can obtain a one- or two-bedroomed apartment in central Fish Hoek for just R500k to R600, while most free-standing homes in the valley sell from around R850k to R1,4m.”
Mountainside properties commanding panoramic views are a little pricier, but still a very affordable R1,8m to R3m. The town has always been popular with retirees due to its lovely flat and easy-to-access beachfront, but is also attracting young families and even professionals who commute into town.
Towns like Kommetjie and Noordhoek are also attracting increasing numbers of young families who are choosing to raise their children in a more rural environment, and who want affordable, sizable family homes.
Southern Suburbs
Cape Town’s leafy Southern Suburbs are widely perceived as offering quality family homes on large plots, located close to the University of Cape Town and a number of top schools. The reputation is fully justified, and such homes frequently come with substantial price tags.
But, says PGP’s area manager Howard Markham, it would be inaccurate to think that the Southern Suburbs are out of range of smaller budget buyers. “There are a number of options for entry-level buyers and young couples wanting to obtain a foothold in this sought-after market, and even for family buyers needing larger homes.
“Suburbs such as Observatory, Claremont, Kenilworth and Pinelands offer plenty of homes priced under R3m, as do Bergvliet and certain pockets of Tokai. One can still obtain a three-or four-bedroomed home on up to 800sqm, within this range.
And Harfield Village, for example, is growing steadily in popularity with first-time buyers and young couples without children, who love its manageable-sized plots, attractive homes and central location. One can buy a four-bedroomed home with a double garage here for R2,35m.”
Markham says there is also limited activity in the investor market under R3m at present, mainly from parents buying sectional title units for their student children.
Atlantic Seaboard and City Bowl
The growth of residential opportunities in Cape Town’s Central City has opened up many new options for entry-level buyers and those seeking homes under R3m.
One can obtain starter apartments in the heart of the business district for around R500k for a bachelor unit, or R1m to R2,5m for larger two-bedroomed options. These are extremely popular with young professionals working in the city, and are also considered by investors due to the rental returns they can command.
Those wanting to live close to the sea might consider Mouille Point, where one can still obtain a one-bedroomed apartment from R1,25m. And in neighbouring Green Point, bachelor flats are priced from around R500k, while larger two-bedroomed units can be obtained for closer to R2m.
Although more upmarket areas of the City Bowl, such as Oranjezicht and Vredehoek, tend to attract higher prices, it is still possible to obtain older homes in these areas for under R2,5m, says PGP’s area manager Basil Moraitis – if one has the budget and willingness to carry out renovation work.
Lanice Steward, MD of the Cape Peninsula estate agency Anne Porter Knight Frank (APKF), says the emerging middle class will boost prices in the traditional Cape suburbs.
“Anyone buying for investment purposes in the Cape Peninsula right now will be onto a sound investment no matter which suburb he chooses,” said Steward.
“The reason is clear: with a mountain and a nature reserve taking up 65% of the available land, property in the traditional Cape suburbs will increasingly be in short supply. It is in these traditional suburbs that the emerging middle class aspire to live.
“This does not mean that Cape Flats suburbs like Grassy Park, Mitchells Plain and Ottery will not gain in value, but areas like Lower Wynberg, Rondebosch East, Diep River, Retreat, Goodwood and Sea Point, which are still low priced are set to take off.”
The best long term prospect, and the one she would tip to any person looking for a lifestyle as well as a sound investment, said Steward, is Simons Town.
“With commuting problems hitting the outlying areas, the convenience of a comfortable 53 minute train ride to the city is increasingly appreciated. Add to that a charming Southampton-type main street, good restaurants, a flourishing yacht club, a challenging golf course (currently in near-perfect condition), a lively cultural life and wonderful mountain walks and minimal crime, and it is quite clear that a decade from now Simons Town will be the place to live.”
This fact, said Steward, is already recognised by buyers who can expect to pay anything from R2,5m to R4m for a standard three bedroom house, but who are still able to find bachelor pads below R1m while at the upper end of the price range there are many homes priced in the R10m to R20m bracket. – Eugene Brink
We offer property investment opportunities throughout South Africa and Europe
Friday, 17 September 2010
Home owners must reduce prices by 10pc to sell properties
A total of 32 per cent more estate agents reported a fall rather than a rise in house prices in August, compared to 8 per cent the previous month, according to the latest housing survey from the Royal Institution of Chartered Surveyors. That is the lowest reading since May 2009.
It comes amid a decline in the number of first-time buyers – a key component in maintaining values.
Stuart Allan, a RICS member from Bishop Auckland in Co. Durham, said: “There is a dearth of first-time buyers principally due to difficulties in obtaining mortgages and this has depressed the value of houses at the lower end of the market.
“These houses are typically selling for up to 10 per cent less than the estate agents advertised prices and this is reflected throughout the market.
“Vendors or property are required to be more realistic in their sale price expectations.”
Tom Goodley, a RICS member form Norfolk, said: “There appears to be a lot of over priced houses on the market, and a shortage of buyers. The basic economics of supply and demand must prevail.”
The share of the market occupied by first-time buyers dropped to 34 per cent in July, down from 38 per cent the previous month and the lowest proportion since the beginning of the credit crisis in August 2007, according to the Council of Mortgage Lenders.
First-time buyers are struggling to get on the property ladder as banks further tighten lending criteria.
These buyers have a typical deposit of 24 per cent of the value of their home, up from 21 per cent in April.
The CML also disclosed an increase in the number of loans approved to those buying a new home to 56,000 in July, up from 52,000 in June - although this remains significantly below long term averages.
Howard Archer, of economists Global Insight, said: “This mortgage data for July remains very low compared to long-term norms and does little to dilute suspicion that house prices will remain under pressure.
“It is also notable that mortgage approvals to first time buyers actually weakened in July, which suggests not only that they may be becoming more reluctant to move into the housing market in the current uncertain economic environment. It also suggests that first time buyers are finding it hard to get mortgages.”
Nicholas Leeming, of property website Zoopla.co.uk, said: “A crucial indicator of the health of the housing market is activity by first time buyers. The lack of attractive mortgage deals, combined with uncertainty around the economic impact of the government’s spending cuts affecting both lenders and borrowers, is seeing many frustrated first-time-buyers opt for renting in the short term.
“The mortgage market remains dominated by the cash-rich, with deposits on new homes increasing once again this month.”
It comes amid a decline in the number of first-time buyers – a key component in maintaining values.
Stuart Allan, a RICS member from Bishop Auckland in Co. Durham, said: “There is a dearth of first-time buyers principally due to difficulties in obtaining mortgages and this has depressed the value of houses at the lower end of the market.
“These houses are typically selling for up to 10 per cent less than the estate agents advertised prices and this is reflected throughout the market.
“Vendors or property are required to be more realistic in their sale price expectations.”
Tom Goodley, a RICS member form Norfolk, said: “There appears to be a lot of over priced houses on the market, and a shortage of buyers. The basic economics of supply and demand must prevail.”
The share of the market occupied by first-time buyers dropped to 34 per cent in July, down from 38 per cent the previous month and the lowest proportion since the beginning of the credit crisis in August 2007, according to the Council of Mortgage Lenders.
First-time buyers are struggling to get on the property ladder as banks further tighten lending criteria.
These buyers have a typical deposit of 24 per cent of the value of their home, up from 21 per cent in April.
The CML also disclosed an increase in the number of loans approved to those buying a new home to 56,000 in July, up from 52,000 in June - although this remains significantly below long term averages.
Howard Archer, of economists Global Insight, said: “This mortgage data for July remains very low compared to long-term norms and does little to dilute suspicion that house prices will remain under pressure.
“It is also notable that mortgage approvals to first time buyers actually weakened in July, which suggests not only that they may be becoming more reluctant to move into the housing market in the current uncertain economic environment. It also suggests that first time buyers are finding it hard to get mortgages.”
Nicholas Leeming, of property website Zoopla.co.uk, said: “A crucial indicator of the health of the housing market is activity by first time buyers. The lack of attractive mortgage deals, combined with uncertainty around the economic impact of the government’s spending cuts affecting both lenders and borrowers, is seeing many frustrated first-time-buyers opt for renting in the short term.
“The mortgage market remains dominated by the cash-rich, with deposits on new homes increasing once again this month.”
High number of distress sales in Western Cape
The level of indebtedness in the Western Cape is the highest in SA and this is having an obvious and adverse impact on the property market in the province.
The latest Cape Metro FNB Property Barometer reveals that just over 15% of home sellers in the second quarter of 2010 sold because they were forced to do so by financial pressure or as a result of having their homes repossessed by a bank.
The 15,5% was some 3% higher than the number selling to upgrade their homes in the same quarter – a complete reversal from the situation in 2006 – 2007.
Clinton Martle, FNB Home Loans’ regional sales manager for the Western Cape, says the Western Cape is believed to have the highest level of indebtedness, or a debt-to-disposable income ratio of 88%. Well lower in second place in Gauteng with a ratio of 88%.
“While the 15,5% is a big improvement on the figures for all four quarters of 2009 (where financial pressure caused up to 33,5% of all sales) it is still a cause for serious concern,” said Lanice Steward, managing director of the estate agency Anne Porter Knight Frank (APKF).
“This type of seller is often so desperate that they will take an unjustifiable drop in their price to get some cash in hand. This, of course, retards the growth in prices and the recovery of the housing sector generally.”
The latest review, said Steward, also indicates that only 6% of sellers are doing so now due to a relocation within South Africa. This, she said, indicates that new jobs are few and far between at the moment, “which is exactly what we would expect in a post-recession period”.
As many as 12% of sellers, however, she said, are moving to be closer to work or amenities, including schools.
“In the Greater Cape Town area, I would guess that up to 15% of those living in the Northern Suburbs and the popular fast growing areas of the West Coast are contemplating a move of this kind so as to be closer to the city.
This is because the commuting times at peak hour traffic have become intolerable. However, the problem may be alleviated by the introduction of the Integrated Rapid Transit System in 2011.”
“The good news is that this has come about because the Western Cape’s per capita income is the second highest in the country. However, an average debt level of 101% in relation to income, i.e. a debt level of just on a total of an individual’s annual earnings, will limit borrowers’ ability to get loans from the banks – who, by and large, like to see their mortgages awarded to those with little or no debts elsewhere.”
Martle says when it comes to indebtedness, it is difficult to say for sure as to how much the Western Cape’s high level of estimated debt-to-disposable income ratio is due to its high property values. “Nevertheless, I think it must have some effect.
But it is also difficult to ascertain what level of indebtedness means trouble.”
“What we do know, however, it that during the last interest rate hiking cycle, which wasn’t extreme by our historic standards, SA’s level of indebtedness caused a high degree of pain in terms of bad debts.
With the Western Cape being on the high end of the indebtedness caused a high degree of pain in terms of bad debts. With the Western Cape being on the high end of the indebtedness spectrum, therefore, one can’t help but feel that we are vulnerable to nasty surprises such as interest rate hikes and economic downturns,” he said.
Many leaders in the property sector, said Steward, have been campaigning for an easing of the National Credit Act (NCA) criteria. She, however, does not go along with them.
“If well applied, the Act does protect the purchaser in the long term. What really needs to be looked at are the onerous lending criteria applied to self-employed buyers. Although many have been forced into becoming self-employed they have become very successful and are entrepreneurial – exactly the type that South Africa needs right now.”
In most cases, added Steward, the FNB Property Barometer shows that the higher the earnings, the larger the debt incurred. People earning above R750k per annum, she said, have an average debt in relation to income of 156% - over 50% higher than the average for the Western Cape. Under the NCA rules, this makes it very hard for them to qualify for a bond of the size they would probably feel necessary.
Martle concluded by saying that “if you are not on the housing ladder, now may be a good opportunity to get on”. “However, I continue to urge people to buy well-within their means, bearing in mind that interest rates ultimately do rise, not to mention huge electricity and possibly other utilities tariff hikes to come.” – Eugene Brink
The latest Cape Metro FNB Property Barometer reveals that just over 15% of home sellers in the second quarter of 2010 sold because they were forced to do so by financial pressure or as a result of having their homes repossessed by a bank.
The 15,5% was some 3% higher than the number selling to upgrade their homes in the same quarter – a complete reversal from the situation in 2006 – 2007.
Clinton Martle, FNB Home Loans’ regional sales manager for the Western Cape, says the Western Cape is believed to have the highest level of indebtedness, or a debt-to-disposable income ratio of 88%. Well lower in second place in Gauteng with a ratio of 88%.
“While the 15,5% is a big improvement on the figures for all four quarters of 2009 (where financial pressure caused up to 33,5% of all sales) it is still a cause for serious concern,” said Lanice Steward, managing director of the estate agency Anne Porter Knight Frank (APKF).
“This type of seller is often so desperate that they will take an unjustifiable drop in their price to get some cash in hand. This, of course, retards the growth in prices and the recovery of the housing sector generally.”
The latest review, said Steward, also indicates that only 6% of sellers are doing so now due to a relocation within South Africa. This, she said, indicates that new jobs are few and far between at the moment, “which is exactly what we would expect in a post-recession period”.
As many as 12% of sellers, however, she said, are moving to be closer to work or amenities, including schools.
“In the Greater Cape Town area, I would guess that up to 15% of those living in the Northern Suburbs and the popular fast growing areas of the West Coast are contemplating a move of this kind so as to be closer to the city.
This is because the commuting times at peak hour traffic have become intolerable. However, the problem may be alleviated by the introduction of the Integrated Rapid Transit System in 2011.”
“The good news is that this has come about because the Western Cape’s per capita income is the second highest in the country. However, an average debt level of 101% in relation to income, i.e. a debt level of just on a total of an individual’s annual earnings, will limit borrowers’ ability to get loans from the banks – who, by and large, like to see their mortgages awarded to those with little or no debts elsewhere.”
Martle says when it comes to indebtedness, it is difficult to say for sure as to how much the Western Cape’s high level of estimated debt-to-disposable income ratio is due to its high property values. “Nevertheless, I think it must have some effect.
But it is also difficult to ascertain what level of indebtedness means trouble.”
“What we do know, however, it that during the last interest rate hiking cycle, which wasn’t extreme by our historic standards, SA’s level of indebtedness caused a high degree of pain in terms of bad debts.
With the Western Cape being on the high end of the indebtedness caused a high degree of pain in terms of bad debts. With the Western Cape being on the high end of the indebtedness spectrum, therefore, one can’t help but feel that we are vulnerable to nasty surprises such as interest rate hikes and economic downturns,” he said.
Many leaders in the property sector, said Steward, have been campaigning for an easing of the National Credit Act (NCA) criteria. She, however, does not go along with them.
“If well applied, the Act does protect the purchaser in the long term. What really needs to be looked at are the onerous lending criteria applied to self-employed buyers. Although many have been forced into becoming self-employed they have become very successful and are entrepreneurial – exactly the type that South Africa needs right now.”
In most cases, added Steward, the FNB Property Barometer shows that the higher the earnings, the larger the debt incurred. People earning above R750k per annum, she said, have an average debt in relation to income of 156% - over 50% higher than the average for the Western Cape. Under the NCA rules, this makes it very hard for them to qualify for a bond of the size they would probably feel necessary.
Martle concluded by saying that “if you are not on the housing ladder, now may be a good opportunity to get on”. “However, I continue to urge people to buy well-within their means, bearing in mind that interest rates ultimately do rise, not to mention huge electricity and possibly other utilities tariff hikes to come.” – Eugene Brink
Buy-to-let still in the doldrums
Total property buying remained unchanged from the previous quarter, at its record low point of 7%
According to the FNB Estate Agent Survey for the 3RD quarter of 2010, buy-to-let buying expressed as a percentage of total property buying remained unchanged from the previous quarter, at its record low point of 7%
Along with this weak survey reading, agent confidence in the near term prospects for this segment of the property market deteriorated further in the quarter.
After some mildly encouraging signs a quarter ago that the fundamentals behind buy-to-let buying were starting to improve, more recently there are hints that progress has stalled। Agents pointed to a virtually unchanged average gross yield on rental properties of 8% in the 3rd quarter, which is insignificantly lower than the 7.9% of the previous quarter.
However, this comes after two preceding quarters of significant rise in average yield, and while it could be the lagged result of accelerating house price growth prior to mid-year, it would also appear that the rental market remains mediocre.
As at the final quarter of 2010, Rode's flat rental data showed a return to low positive year-onyear rental inflation, but the 1st quarter of 2010 had shown no improvement on that। CPI data, which records actual rental paid (i.e. the combination of the impact of market rentals and escalations), continues to show a declining trend in overall home rental inflation, with the July year-on-year growth rate being a weak 4.5%.
In the mean time, household sector indebtedness remains high, and 2nd quarter economic growth estimates confirm what the SARB Leading Indicator has been showing for some time, i।e. that economic growth has started to soften.
Slowing economic growth can place pressure on household disposable income growth, and thus on potential buy-to-let buying power
Some mildly positive news for the buy-to-let market has surfaced over the past quarter, however, from TPN, whose report on rental tenants has shown an improvement in the average percentage of tenants that are " in good standing" with their landlords. From 79% in the previous quarter, the percentage of total tenants on the TPN system that are in good standing regarding rental payments rose to 82% in the 2nd quarter, according to the latest TPN report.
This is further improvement in an upward trend spanning from the 1st quarter of 2009, at which time this percentage reached a lowly 71%. The improvement has arguably come largely as a result of a far lower interest rate environment since 2008, which can even assist rental tenants, who may have significant levels of debt elsewhere.
However, the improvement in the average performance of tenants has been insufficient to serve as a strong boost to the rental market to date, it would seem.
So, while capital growth on property is uninspiring to those would-be buy-to-let investors who focus more on that, yields are un-enticing for the investor focused on a rental income stream, and so the long wait for an improved buy-to-let market continues.
For the time being, though, many estate agents appear to have given up the wait in the sense that the survey shows a steady deterioration in their near term future expectations of buy-to-let buying.
In the FNB Estate Agent Survey, we ask agents for their expectations regarding the near term expectation for the buy-to-let market, i।e. do they expect strengthening (a rating of 1), weakening (a rating of -1) or unchanged demand (a rating of zero).
We combine their ratings into an index, which runs on a scale from 1 (most optimistic) to -1 (most pessimistic).
For 4 consecutive quarters, we have seen a steady decline in the FNB Buy-to-let Confidence Indicator, from a 3rd quarter 2009 revised high of 0.149 down to a 3rd quarter 2010 level of 0.014.
According to the FNB Estate Agent Survey for the 3RD quarter of 2010, buy-to-let buying expressed as a percentage of total property buying remained unchanged from the previous quarter, at its record low point of 7%
Along with this weak survey reading, agent confidence in the near term prospects for this segment of the property market deteriorated further in the quarter.
After some mildly encouraging signs a quarter ago that the fundamentals behind buy-to-let buying were starting to improve, more recently there are hints that progress has stalled। Agents pointed to a virtually unchanged average gross yield on rental properties of 8% in the 3rd quarter, which is insignificantly lower than the 7.9% of the previous quarter.
However, this comes after two preceding quarters of significant rise in average yield, and while it could be the lagged result of accelerating house price growth prior to mid-year, it would also appear that the rental market remains mediocre.
As at the final quarter of 2010, Rode's flat rental data showed a return to low positive year-onyear rental inflation, but the 1st quarter of 2010 had shown no improvement on that। CPI data, which records actual rental paid (i.e. the combination of the impact of market rentals and escalations), continues to show a declining trend in overall home rental inflation, with the July year-on-year growth rate being a weak 4.5%.
In the mean time, household sector indebtedness remains high, and 2nd quarter economic growth estimates confirm what the SARB Leading Indicator has been showing for some time, i।e. that economic growth has started to soften.
Slowing economic growth can place pressure on household disposable income growth, and thus on potential buy-to-let buying power
Some mildly positive news for the buy-to-let market has surfaced over the past quarter, however, from TPN, whose report on rental tenants has shown an improvement in the average percentage of tenants that are " in good standing" with their landlords. From 79% in the previous quarter, the percentage of total tenants on the TPN system that are in good standing regarding rental payments rose to 82% in the 2nd quarter, according to the latest TPN report.
This is further improvement in an upward trend spanning from the 1st quarter of 2009, at which time this percentage reached a lowly 71%. The improvement has arguably come largely as a result of a far lower interest rate environment since 2008, which can even assist rental tenants, who may have significant levels of debt elsewhere.
However, the improvement in the average performance of tenants has been insufficient to serve as a strong boost to the rental market to date, it would seem.
So, while capital growth on property is uninspiring to those would-be buy-to-let investors who focus more on that, yields are un-enticing for the investor focused on a rental income stream, and so the long wait for an improved buy-to-let market continues.
For the time being, though, many estate agents appear to have given up the wait in the sense that the survey shows a steady deterioration in their near term future expectations of buy-to-let buying.
In the FNB Estate Agent Survey, we ask agents for their expectations regarding the near term expectation for the buy-to-let market, i।e. do they expect strengthening (a rating of 1), weakening (a rating of -1) or unchanged demand (a rating of zero).
We combine their ratings into an index, which runs on a scale from 1 (most optimistic) to -1 (most pessimistic).
For 4 consecutive quarters, we have seen a steady decline in the FNB Buy-to-let Confidence Indicator, from a 3rd quarter 2009 revised high of 0.149 down to a 3rd quarter 2010 level of 0.014.
Don't fight the interest rate gap - Berry Everitt
Property experts are arguing against such a move।
There has been some debate again of late about whether the fixed difference between the repo rate and the prime rate of interest is too large at 3,5 percentage points, and whether government should move to shrink it, but property experts are arguing against such a move।
The difference means that with the 50 basis point decline in the repo rate this week, the prime rate will drop to 9,5%, the lowest level it has reached in almost 30 years।
"The 3,5% is the difference between what banks must pay to borrow money and what they charge consumers to borrow from them," notes Berry Everitt, CEO of the Chas Everitt International property group, "and there are many who think this margin is too big at a time when most consumers are still heavily in debt and battling to make ends meet।
"However, there are several other important factors to consider, the first being that banks have to put a percentage of every loan extended into their reserve funds, which cuts into their profits but provides a prudent hedge against bad debt।
"Banking legislation has seen this reserve requirement increased in recent years and thank goodness, because it enabled the banks to be much more accommodating towards borrowers in distress and default during the recent economic downturn than was possible in the late 1990s, for instance, when soaring interest rates resulted in thousands of people losing their homes."
What is more, he says the banks have only recently begun to show more confidence in lending again, "and that should not be discouraged in any way as it is critical to the full recovery of the property market in particular and the economy in general"।
Thirdly, Everitt says, those calling for the differential between the repo and prime rates to be cut should also consider the many, mostly elderly people whose only income is the interest on their savings।
"Their incomes have been eroded considerably by the eight interest rate decreases since December 2008 and would no doubt fall further if the banks' 3,5% margin were to be decreased।"
*Berry Everitt is the CEO of the Chas Everitt International property group.
There has been some debate again of late about whether the fixed difference between the repo rate and the prime rate of interest is too large at 3,5 percentage points, and whether government should move to shrink it, but property experts are arguing against such a move।
The difference means that with the 50 basis point decline in the repo rate this week, the prime rate will drop to 9,5%, the lowest level it has reached in almost 30 years।
"The 3,5% is the difference between what banks must pay to borrow money and what they charge consumers to borrow from them," notes Berry Everitt, CEO of the Chas Everitt International property group, "and there are many who think this margin is too big at a time when most consumers are still heavily in debt and battling to make ends meet।
"However, there are several other important factors to consider, the first being that banks have to put a percentage of every loan extended into their reserve funds, which cuts into their profits but provides a prudent hedge against bad debt।
"Banking legislation has seen this reserve requirement increased in recent years and thank goodness, because it enabled the banks to be much more accommodating towards borrowers in distress and default during the recent economic downturn than was possible in the late 1990s, for instance, when soaring interest rates resulted in thousands of people losing their homes."
What is more, he says the banks have only recently begun to show more confidence in lending again, "and that should not be discouraged in any way as it is critical to the full recovery of the property market in particular and the economy in general"।
Thirdly, Everitt says, those calling for the differential between the repo and prime rates to be cut should also consider the many, mostly elderly people whose only income is the interest on their savings।
"Their incomes have been eroded considerably by the eight interest rate decreases since December 2008 and would no doubt fall further if the banks' 3,5% margin were to be decreased।"
*Berry Everitt is the CEO of the Chas Everitt International property group.
Thursday, 9 September 2010
SARB cuts interest rates to prime 9.5%
The South African Reserve Bank's monetary policy committee cut the key repo rate by half a percentage point on Thursday.
The new repo rate is 6%, with the prime lending rate to change 9,5%
The repo rate is the rate at which the central bank lends to other banks, while the prime lending rate is the benchmark rate at which banks lend to customers. The decision to cut rates had been expected
Most economists have argued for a rate cut to boost the economy in the wake of a favourable inflation outlook, as well as slower gross domestic product growth figures and factory data.
The July rate of change in the consumer price index (CPI) came in at 3.7% from 4.2% in June. On Wednesday, Statistics SA reported annual manufacturing production growth of 7.5%, well down on June's growth rate of 9.3%.
Bank governor Gill Marcus said the MPC views the decision to be consistent with the continued attainment of the inflation target, having given due regard to the risks in the outlook."The scope for further downward movement is seen to be limited, but this will be assessed on an ongoing basis. Our approach remains forward-looking and is informed by close examination of the data and future developments," she said.
Reacting to the MPC's decision, chairperson of the National Consumer Forum said: "I think this is something consumers are going to welcome as they've also recently had a drop in the price of petrol. They should use this opportunity to pay off their debts."
Efficient Financial Holdings economist Freddie Mitchell said: "The cut was not surprising at all given the data out of the second quarter. Like the Governor said, the scope for interest rate cuts is getting narrower, I don't thing we'll see another cut this year."
The new repo rate is 6%, with the prime lending rate to change 9,5%
The repo rate is the rate at which the central bank lends to other banks, while the prime lending rate is the benchmark rate at which banks lend to customers. The decision to cut rates had been expected
Most economists have argued for a rate cut to boost the economy in the wake of a favourable inflation outlook, as well as slower gross domestic product growth figures and factory data.
The July rate of change in the consumer price index (CPI) came in at 3.7% from 4.2% in June. On Wednesday, Statistics SA reported annual manufacturing production growth of 7.5%, well down on June's growth rate of 9.3%.
Bank governor Gill Marcus said the MPC views the decision to be consistent with the continued attainment of the inflation target, having given due regard to the risks in the outlook."The scope for further downward movement is seen to be limited, but this will be assessed on an ongoing basis. Our approach remains forward-looking and is informed by close examination of the data and future developments," she said.
Reacting to the MPC's decision, chairperson of the National Consumer Forum said: "I think this is something consumers are going to welcome as they've also recently had a drop in the price of petrol. They should use this opportunity to pay off their debts."
Efficient Financial Holdings economist Freddie Mitchell said: "The cut was not surprising at all given the data out of the second quarter. Like the Governor said, the scope for interest rate cuts is getting narrower, I don't thing we'll see another cut this year."
Friday, 27 August 2010
Buying Off-Plan has Pitfalls
Although buying off-plan has the big benefit of no transfer costs, it also holds some pitfalls of which buyers need to be aware।
Paul Henry, the managing director of Rawson Developers, has warned that there is always a danger that the final product may not be as good as the computer graphics and plans have led the buyer to expect।
He said there is also a danger that the specifications list will be vague and non-specific, thereby allowing the developer considerable leeway in his selection of the fittings and fixtures।
Another possible danger, said Henry, is that the contract can be open-ended as regards the time. “With bank finance hard to come by and banks insisting on a high percentage of sales before they advance money, projects can be held up for long periods before the first work begins on site.”
On the other hand, buying off-plan enables the buyer, in return for a small deposit, to get a fixed price related to today’s values and then to watch it escalate in value for a year or two, during which time no further outlays are called for।
“Experience has shown that this can be a highly profitable form of investment – with the huge advantage that the investor is able to gear it। This is seldom possible with the majority of other investments.”
He says the only real safeguard against these dangers is the developer’s reputation.
“If he has been in business some time and has a good track record, you can probably be confident that the final product will be on time and up to standard। If he is a new name on the scene, with little development experience, it will pay to have a good lawyer go through the deed of sale, to insist on guarantees and, above all, to ensure that your deposit goes into a ring-fenced trust।”
Three questions, said Henry, should be put to the clients of all developers।
The first is: “Did the finished product exceed your expectations for a unit in this price range?”। If the developer is good, the answer will always be “yes”.
The second question is: “Has your unit experienced capital growth?”। That, said Henry, may be a tough proposition in today’s market but many good developers can even now show significant value growth on their units over the last year or two, as well as on those due to come on stream in the next year.
The third question, in many ways the most important, is: “Did the developer attend conscientiously to the snag list?”।
All too often, said Henry, developers have been hard to contact once a unit has been transferred. "This is disgraceful behaviour because 70% of units will require some post-handover attention."
Henry added that, although some very big projects have been highly successful, he personally would always be wary of any project on which the work is likely to be ongoing for years and years।
“This type of scenario can lead people to feeling they are living on a permanent building site. Reasonably small schemes – say, with not more than 200 units – in good areas still offer the best and safest investments.”
Paul Henry, the managing director of Rawson Developers, has warned that there is always a danger that the final product may not be as good as the computer graphics and plans have led the buyer to expect।
He said there is also a danger that the specifications list will be vague and non-specific, thereby allowing the developer considerable leeway in his selection of the fittings and fixtures।
Another possible danger, said Henry, is that the contract can be open-ended as regards the time. “With bank finance hard to come by and banks insisting on a high percentage of sales before they advance money, projects can be held up for long periods before the first work begins on site.”
On the other hand, buying off-plan enables the buyer, in return for a small deposit, to get a fixed price related to today’s values and then to watch it escalate in value for a year or two, during which time no further outlays are called for।
“Experience has shown that this can be a highly profitable form of investment – with the huge advantage that the investor is able to gear it। This is seldom possible with the majority of other investments.”
He says the only real safeguard against these dangers is the developer’s reputation.
“If he has been in business some time and has a good track record, you can probably be confident that the final product will be on time and up to standard। If he is a new name on the scene, with little development experience, it will pay to have a good lawyer go through the deed of sale, to insist on guarantees and, above all, to ensure that your deposit goes into a ring-fenced trust।”
Three questions, said Henry, should be put to the clients of all developers।
The first is: “Did the finished product exceed your expectations for a unit in this price range?”। If the developer is good, the answer will always be “yes”.
The second question is: “Has your unit experienced capital growth?”। That, said Henry, may be a tough proposition in today’s market but many good developers can even now show significant value growth on their units over the last year or two, as well as on those due to come on stream in the next year.
The third question, in many ways the most important, is: “Did the developer attend conscientiously to the snag list?”।
All too often, said Henry, developers have been hard to contact once a unit has been transferred. "This is disgraceful behaviour because 70% of units will require some post-handover attention."
Henry added that, although some very big projects have been highly successful, he personally would always be wary of any project on which the work is likely to be ongoing for years and years।
“This type of scenario can lead people to feeling they are living on a permanent building site. Reasonably small schemes – say, with not more than 200 units – in good areas still offer the best and safest investments.”
Friday, 20 August 2010
Six Reasons NOT to buy property
...and why none of them hold much water।
We often hear about real estate investors who have been very successful in building wealth-creating portfolios। We may believe that they have some very special skill or ability, that there is something they know which nobody else does. At other times, we think it was pure luck or coincidence that an investor succeeded, that circumstances have since changed or that it just can't be done. Our cynicism encourages us to do nothing, to avoid the risk.
Yet history proves that doing nothing could be the most risky of all। Apart from the missed wealth creating opportunities, doing nothing translates into a lack of self-development, a missed chance to learn and grow. If we delve deeper, it is clear that most of the reasons people use not to invest are actually based more on emotion than business savvy. We rationalise our fear using calculated arguments as to why it can't or won't work. But the truth is that none of these arguments really hold much validity.
So let's discuss the top six reasons why people decide not to invest in property। And lay them to rest-once and for all.
Reason # 1: Investing in property is risky
Fact: There is a certain level of risk in every investment-and property is no exception। But investing all your money in the bank (or even worse under the mattress) may be the most risky of all as the returns barely keep up with inflation. Also bricks and mortar is more tangible than stocks and you can take out insurance against fires or floods. You can also protect your asset against your death or disability. And yes, there is now even insurance available to cover landlords for non-paying tenants!
Reason # 2: I don't have the time
Fact: We all manage to find the time to do things we really want to do. Time management involves prioritising things that are more important. Anyway, you don't need to do it all yourself. Build a team of competent management agents, brokers and mortgage originators (yes, there are some out there!) and let their specialist skills work for you.
Reason # 3: I don't have the money
Fact: You DON'T need money to make money। Even in a market where 100% bonds are not widely offered, a good below market value deal will attract finance from investors। Network with people who share your passion for property and these investment opportunities will present themselves।
Reason # 4: Below market-value properties don't exist
Fact: No matter what the stage of the property life-cycle, there will always be value for money deals। The key is to identify initially whether the seller is motivated and only negotiate with motivated sellers. As long as there is divorce, relocation or excessive debt, motivated sellers will always be out there.
Reason # 5: The property market will go down
Fact: The property market has never gone down over the medium or long term. Does that mean that it won't in the future? Probably not, simply because property prices rise in relation to income levels which increase over time. Even political factors, crime and other excuses people use not to invest, have not had a serious impact on our or overseas markets. At times, these factors often have the reverse effect-lifting prices as investors choose the safer haven of bricks and mortar.
And if prices DO go down over the next few years? Who cares! Buying for the rental yield and at below market value still ensures the investor comes out trumps।
Reason # 6: I don't know where to begin
Fact: You only learn through action. Educate yourself and when you feel a good opportunity presents itself, take the plunge. It may not be the best deal you may ever do but it will be the most important in terms of confidence. Luckily, over the long term, property is very forgiving of peoples` mistakes.
We often hear about real estate investors who have been very successful in building wealth-creating portfolios। We may believe that they have some very special skill or ability, that there is something they know which nobody else does. At other times, we think it was pure luck or coincidence that an investor succeeded, that circumstances have since changed or that it just can't be done. Our cynicism encourages us to do nothing, to avoid the risk.
Yet history proves that doing nothing could be the most risky of all। Apart from the missed wealth creating opportunities, doing nothing translates into a lack of self-development, a missed chance to learn and grow. If we delve deeper, it is clear that most of the reasons people use not to invest are actually based more on emotion than business savvy. We rationalise our fear using calculated arguments as to why it can't or won't work. But the truth is that none of these arguments really hold much validity.
So let's discuss the top six reasons why people decide not to invest in property। And lay them to rest-once and for all.
Reason # 1: Investing in property is risky
Fact: There is a certain level of risk in every investment-and property is no exception। But investing all your money in the bank (or even worse under the mattress) may be the most risky of all as the returns barely keep up with inflation. Also bricks and mortar is more tangible than stocks and you can take out insurance against fires or floods. You can also protect your asset against your death or disability. And yes, there is now even insurance available to cover landlords for non-paying tenants!
Reason # 2: I don't have the time
Fact: We all manage to find the time to do things we really want to do. Time management involves prioritising things that are more important. Anyway, you don't need to do it all yourself. Build a team of competent management agents, brokers and mortgage originators (yes, there are some out there!) and let their specialist skills work for you.
Reason # 3: I don't have the money
Fact: You DON'T need money to make money। Even in a market where 100% bonds are not widely offered, a good below market value deal will attract finance from investors। Network with people who share your passion for property and these investment opportunities will present themselves।
Reason # 4: Below market-value properties don't exist
Fact: No matter what the stage of the property life-cycle, there will always be value for money deals। The key is to identify initially whether the seller is motivated and only negotiate with motivated sellers. As long as there is divorce, relocation or excessive debt, motivated sellers will always be out there.
Reason # 5: The property market will go down
Fact: The property market has never gone down over the medium or long term. Does that mean that it won't in the future? Probably not, simply because property prices rise in relation to income levels which increase over time. Even political factors, crime and other excuses people use not to invest, have not had a serious impact on our or overseas markets. At times, these factors often have the reverse effect-lifting prices as investors choose the safer haven of bricks and mortar.
And if prices DO go down over the next few years? Who cares! Buying for the rental yield and at below market value still ensures the investor comes out trumps।
Reason # 6: I don't know where to begin
Fact: You only learn through action. Educate yourself and when you feel a good opportunity presents itself, take the plunge. It may not be the best deal you may ever do but it will be the most important in terms of confidence. Luckily, over the long term, property is very forgiving of peoples` mistakes.
Strike dashes World Cup hopes
THE strikes in the public service and automotive sectors would deter foreign direct investment in SA, a significant contrast to the global optimism about the country during and straight after the Soccer World Cup, economists said yesterday।
“The timing of the strike is problematic, considering the World Cup created such a good impression to potential investors। These hopes would be surely dashed,” said Stanlib economist Kevin Lings.
He said SA could not afford to have nationwide strikes on this scale, especially as the recovery taking place after the global recession was still fragile ।
“The bottom line is that the strikes come at a critical phase of recovery from recession। Most countries are looking at their own economic recovery so that they can gain momentum as soon as possible, Mr Lings said.
Public service unions are demanding an 8,6% wage increase, a R700 housing allowance and an equalisation of medical subsidies.
Yesterday, the South African Democratic Teachers Union (Sadtu) and the National Education Health and Allied Workers Union — together representing nearly 500000 workers — rejected the government’s revised wage offer।
Public schools, hospitals and other government administration offices are expected to close today because of an indefinite strike by public service workers।
“The disruption of services, particularly schools, comes at the wrong time, especially when the country is trying to lift up its matric pass rate,” said Mr Lings। He noted that wages could not be separated from service delivery.
Sadtu said: “The current macroeconomic policy, which is a political matter, is responsible for low wages in the public services।”
Public Service and Administration D eputy M inister Roy Padayachie said the government remained committed to finding a solution to the public service wage dispute।
“We are in the midst of trying to finalise the negotiations in the public sector dispute,” Mr Padayachie said। “We cannot allow ourselves to be compromised from meeting the obligations that we as a government have committed in our programme of action … the issues of finding an appropriate solution and ensuring that the strike is averted are very central to our commitment,” he said.
Meanwhile, the car strike entered its fifth day yesterday, with workers and employers reaching a deadlock over wage negotiations।
Both the National Union of Metalworkers of SA (Numsa) and the Automotive Manufacturers Employers Organisation (Ameo) kept mum over yesterday’s wage negotiation outcome, saying it was at a “sensitive stage”।
George Glynos, an economist at ETM, said the labour dispute might indicate to foreign investors that SA’s automotive industry did not offer the level of productivity required to justify investment capital।
“When there are significant labour problems, companies prefer to spend money on capital equipment to improve efficiencies। Of course, this is not ideal, but is often the necessary course of action.”
Mr Glynos said that investors were well aware that SA had a powerful labour movement, and this had not stopped investment from entering the country।
“Obviously the unions’ power is a deterrent, but investors realise that SA has massive potential and untapped labour reserves which can and have been used to their advantage,” he said.
However, Mr Glynos noted that the public sector and automotive industry strikes were putting pressure on an economy that was bogged down by rising energy costs and eroding infrastructure।
chilwanel@bdfm.co.za shirleyb@bdfm.co.za
“The timing of the strike is problematic, considering the World Cup created such a good impression to potential investors। These hopes would be surely dashed,” said Stanlib economist Kevin Lings.
He said SA could not afford to have nationwide strikes on this scale, especially as the recovery taking place after the global recession was still fragile ।
“The bottom line is that the strikes come at a critical phase of recovery from recession। Most countries are looking at their own economic recovery so that they can gain momentum as soon as possible, Mr Lings said.
Public service unions are demanding an 8,6% wage increase, a R700 housing allowance and an equalisation of medical subsidies.
Yesterday, the South African Democratic Teachers Union (Sadtu) and the National Education Health and Allied Workers Union — together representing nearly 500000 workers — rejected the government’s revised wage offer।
Public schools, hospitals and other government administration offices are expected to close today because of an indefinite strike by public service workers।
“The disruption of services, particularly schools, comes at the wrong time, especially when the country is trying to lift up its matric pass rate,” said Mr Lings। He noted that wages could not be separated from service delivery.
Sadtu said: “The current macroeconomic policy, which is a political matter, is responsible for low wages in the public services।”
Public Service and Administration D eputy M inister Roy Padayachie said the government remained committed to finding a solution to the public service wage dispute।
“We are in the midst of trying to finalise the negotiations in the public sector dispute,” Mr Padayachie said। “We cannot allow ourselves to be compromised from meeting the obligations that we as a government have committed in our programme of action … the issues of finding an appropriate solution and ensuring that the strike is averted are very central to our commitment,” he said.
Meanwhile, the car strike entered its fifth day yesterday, with workers and employers reaching a deadlock over wage negotiations।
Both the National Union of Metalworkers of SA (Numsa) and the Automotive Manufacturers Employers Organisation (Ameo) kept mum over yesterday’s wage negotiation outcome, saying it was at a “sensitive stage”।
George Glynos, an economist at ETM, said the labour dispute might indicate to foreign investors that SA’s automotive industry did not offer the level of productivity required to justify investment capital।
“When there are significant labour problems, companies prefer to spend money on capital equipment to improve efficiencies। Of course, this is not ideal, but is often the necessary course of action.”
Mr Glynos said that investors were well aware that SA had a powerful labour movement, and this had not stopped investment from entering the country।
“Obviously the unions’ power is a deterrent, but investors realise that SA has massive potential and untapped labour reserves which can and have been used to their advantage,” he said.
However, Mr Glynos noted that the public sector and automotive industry strikes were putting pressure on an economy that was bogged down by rising energy costs and eroding infrastructure।
chilwanel@bdfm.co.za shirleyb@bdfm.co.za
SA house prices - Some recovery signs
Although the growth in SA house prices is not stellar, it has exhibited some recovery signs since 2009 and affordability is on a good path again।
But it is still a lot cheaper to buy an existing house than build a new one.
Based on the outlook for nominal house price growth and a projected average consumer price inflation rate of about 5% in 2010, real price growth of between 5% and 5,5% is forecast for this year and 10,5% in nominal terms।
So says Jacques du Toit, property strategist at Absa, who adds that this will occur after house prices dropped by a real 6,9% in 2009 and declined by 6,3% in real terms in 2008.
“House price growth has improved markedly in the first half of 2010, based on the better economic conditions since the second half of 2009, low interest rates, banks’ less tight lending criteria as well as base effects।”
“However, taking into account house price developments in the recent past, year-on-year (y/y) price growth appears to be near an upper turning point, largely as a result of the base effects of a recovery in house price growth in the second half of 2009। This is expected to impact the trend in price growth in the second half of this year.”
He says after the affordability of housing deteriorated in the second half of 2009 on the back of rising house price growth while growth in household income remained under pressure, affordability did not deteriorate further in the first quarter of 2010. “This is based on the latest trends in the ratios of house prices and mortgage repayments to household disposable income.”
He says the ratio of house prices to disposable income was relatively stable in the first quarter of the year compared with the last quarter of 2009, which was the net result of house price and nominal disposable income growth in the first quarter।
“House prices increased by a nominal 3,2% quarter-on-quarter (q/q) in the first quarter of 2010, while households’ nominal disposable was up by 3,6% q/q in the same period। The ratio of mortgage repayments to household disposable income was slightly down in the first quarter of 2010 compared with the preceding quarter.
“This was the net result of the abovementioned trends in nominal house prices and household disposable income in the first quarter, while the mortgage interest rate was on average slightly lower during this period।”
In the affordable segment of the market (houses of 40-79sqm, priced at up to R430k) the average price of a house increased by a nominal 2,6% y/y to a level of R296,100 in the second quarter (Q2) of 2010, declining by 1,9% in real terms।
Middle-segment house price growth (houses of 80-400sqm, priced at up to R3,1m) averaged a nominal 14,4% y/y in the second quarter of 2010। This brought the average price to a level of R1,075,600 in the quarter. House prices in the middle-segment increased by a real 9,4% y/y in the second quarter of the year.
In the luxury segment (houses valued at above R3,1m up to R11,5m), the average price dropped by a nominal 1,8% y/y to a level of about R4,4m in the second quarter of the year। In real terms prices of houses in the luxury segment were down by 6,1% y/y in the second quarter.
Du Toit said at a geographical level home values increased further in nominal terms on a y/y basis in the second quarter of 2010, while in real terms prices were slightly down in some areas compared with a year ago। On a quarterly basis prices were down in both nominal and real terms in a few provinces, metropolitan areas and coastal regions.
“These trends might be an early indication of expected price developments towards the end of the year,” he said।
At a provincial level, nominal year-on-year (y/y) house price growth varied between 7,1% in Mpumalanga to as high as 24,9% in the Eastern Cape in the second quarter of 2010।
In the major metropolitan areas house price growth ranged from a nominal 3,2% y/y on the East Rand in Gauteng to a relatively strong 22,6% y/y in the Durban/Pinetown area in KwaZulu-Natal in Q2 2010।
Another encouraging trend is the fairly strong rise in house prices at coastal level, where much of the buying activity is centred on second and leisure homes। These properties are being shed by investors at an unprecedented pace as affordability comes under pressure.
Du Toit said house prices in the coastal regions increased by a nominal 7,8% y/y in the second quarter of 2010, after rising by 6,3% y/y in the preceding quarter। “This is an indication that the coastal market is recovering at a steady pace, but is still lagging in price growth compared with some other regions.
“In real terms, house prices in the country’s coastal regions increased by 3% y/y in the second quarter of 2010, after rising by 0,6% y/y in the first quarter of the year।
Moving onto building costs, Du Toit pointed out that in the second quarter of 2010 the cost of building a new house in the middle segment of the market increased by a nominal 7,8% y/y, which is up from a growth rate of 6,7% y/y recorded in the first quarter।
“Although the residential building and construction sector is experiencing tough conditions, judging from the latest trends in the planning and construction phases of new housing, the upward trend in building cost increases over the past two quarters is probably related to rising costs such as wages, transport, etc॥”
“Against this background of faster rising building costs over the past two quarters, the average value of a new house increased by a nominal 15,5% y/y to R1,396,200 in the second quarter of the year (12,9% y/y in the first quarter), which came to a real increase of 10,4% y/y (a real 6,8% y/y in the preceding quarter)।
The average value of an existing house increased by a nominal 14,6% y/y to about R1,067,500 in the second quarter of 2010 (10,1% y/y in the first quarter)। In real terms this translated into an increase of 9,6% y/y in the second quarter (4,2% y/y in the preceding quarter).
“As a result of the abovementioned price trends, it was around R328,700, or 23,5%, cheaper to buy an existing house than to have a new one built in the second quarter of 2010.”
He said land values for new housing increased by a nominal 14% y/y to an average of about R498,100 in the second quarter of 2010, compared with an increase of 7,1% y/y in the first quarter।
“In real terms land values increased by 9% y/y in the second quarter (up by 1,3% y/y in the preceding quarter)। The faster pace of year-on-year (y/y) growth in land values in the second quarter of the year is evident of improved residential property market conditions in many areas up to mid-2010.
“Along the coast, however, land values for new housing still experienced some downward pressure in the second quarter of the year, declining by a nominal 4,4% y/y and a real 8,6% y/y in the quarter। This brought the average nominal value of a coastal stand to a level of about R430,900 in the second quarter.”
More good news is that mortgage finance is now also a lot cheaper than two years ago.
Du Toit says commercial banks’ variable mortgage interest rate is currently 10%, which is at its lowest level since mid-1974।
“Moreover, as a result of the interest rate cuts over the last 18 months, monthly mortgage repayments are 28,7% lower compared with December 2008, when the mortgage rate was still 15,5%।”
Meanwhile, the Lightstone National House Price Index has continued its rising inflation path, reaching 8,3% in April 2010, up from a y/y inflation rate of 8,2% in March and 7,7% in February, it showed on Monday।
The lower inflation rate environment started feeding through earlier in the year, and while coastal properties provided something of a drag until February, those properties have caught up in April via a handsome rate of 8%। They were growing at just 5,3% in February.
The index showed an interesting turnaround occurred for Johannesburg properties as their growth dipped to 7,8% from 8,6% in March and after boasting the highest growth rates in the country for some time।
The best performing province in March was Cape Town at a healthy 9,8% click.
Affordable houses, though, ratcheted up by 14,7% from 12,6% as luxury home growth rates dipped to 7,6% from 8%.
But it is still a lot cheaper to buy an existing house than build a new one.
Based on the outlook for nominal house price growth and a projected average consumer price inflation rate of about 5% in 2010, real price growth of between 5% and 5,5% is forecast for this year and 10,5% in nominal terms।
So says Jacques du Toit, property strategist at Absa, who adds that this will occur after house prices dropped by a real 6,9% in 2009 and declined by 6,3% in real terms in 2008.
“House price growth has improved markedly in the first half of 2010, based on the better economic conditions since the second half of 2009, low interest rates, banks’ less tight lending criteria as well as base effects।”
“However, taking into account house price developments in the recent past, year-on-year (y/y) price growth appears to be near an upper turning point, largely as a result of the base effects of a recovery in house price growth in the second half of 2009। This is expected to impact the trend in price growth in the second half of this year.”
He says after the affordability of housing deteriorated in the second half of 2009 on the back of rising house price growth while growth in household income remained under pressure, affordability did not deteriorate further in the first quarter of 2010. “This is based on the latest trends in the ratios of house prices and mortgage repayments to household disposable income.”
He says the ratio of house prices to disposable income was relatively stable in the first quarter of the year compared with the last quarter of 2009, which was the net result of house price and nominal disposable income growth in the first quarter।
“House prices increased by a nominal 3,2% quarter-on-quarter (q/q) in the first quarter of 2010, while households’ nominal disposable was up by 3,6% q/q in the same period। The ratio of mortgage repayments to household disposable income was slightly down in the first quarter of 2010 compared with the preceding quarter.
“This was the net result of the abovementioned trends in nominal house prices and household disposable income in the first quarter, while the mortgage interest rate was on average slightly lower during this period।”
In the affordable segment of the market (houses of 40-79sqm, priced at up to R430k) the average price of a house increased by a nominal 2,6% y/y to a level of R296,100 in the second quarter (Q2) of 2010, declining by 1,9% in real terms।
Middle-segment house price growth (houses of 80-400sqm, priced at up to R3,1m) averaged a nominal 14,4% y/y in the second quarter of 2010। This brought the average price to a level of R1,075,600 in the quarter. House prices in the middle-segment increased by a real 9,4% y/y in the second quarter of the year.
In the luxury segment (houses valued at above R3,1m up to R11,5m), the average price dropped by a nominal 1,8% y/y to a level of about R4,4m in the second quarter of the year। In real terms prices of houses in the luxury segment were down by 6,1% y/y in the second quarter.
Du Toit said at a geographical level home values increased further in nominal terms on a y/y basis in the second quarter of 2010, while in real terms prices were slightly down in some areas compared with a year ago। On a quarterly basis prices were down in both nominal and real terms in a few provinces, metropolitan areas and coastal regions.
“These trends might be an early indication of expected price developments towards the end of the year,” he said।
At a provincial level, nominal year-on-year (y/y) house price growth varied between 7,1% in Mpumalanga to as high as 24,9% in the Eastern Cape in the second quarter of 2010।
In the major metropolitan areas house price growth ranged from a nominal 3,2% y/y on the East Rand in Gauteng to a relatively strong 22,6% y/y in the Durban/Pinetown area in KwaZulu-Natal in Q2 2010।
Another encouraging trend is the fairly strong rise in house prices at coastal level, where much of the buying activity is centred on second and leisure homes। These properties are being shed by investors at an unprecedented pace as affordability comes under pressure.
Du Toit said house prices in the coastal regions increased by a nominal 7,8% y/y in the second quarter of 2010, after rising by 6,3% y/y in the preceding quarter। “This is an indication that the coastal market is recovering at a steady pace, but is still lagging in price growth compared with some other regions.
“In real terms, house prices in the country’s coastal regions increased by 3% y/y in the second quarter of 2010, after rising by 0,6% y/y in the first quarter of the year।
Moving onto building costs, Du Toit pointed out that in the second quarter of 2010 the cost of building a new house in the middle segment of the market increased by a nominal 7,8% y/y, which is up from a growth rate of 6,7% y/y recorded in the first quarter।
“Although the residential building and construction sector is experiencing tough conditions, judging from the latest trends in the planning and construction phases of new housing, the upward trend in building cost increases over the past two quarters is probably related to rising costs such as wages, transport, etc॥”
“Against this background of faster rising building costs over the past two quarters, the average value of a new house increased by a nominal 15,5% y/y to R1,396,200 in the second quarter of the year (12,9% y/y in the first quarter), which came to a real increase of 10,4% y/y (a real 6,8% y/y in the preceding quarter)।
The average value of an existing house increased by a nominal 14,6% y/y to about R1,067,500 in the second quarter of 2010 (10,1% y/y in the first quarter)। In real terms this translated into an increase of 9,6% y/y in the second quarter (4,2% y/y in the preceding quarter).
“As a result of the abovementioned price trends, it was around R328,700, or 23,5%, cheaper to buy an existing house than to have a new one built in the second quarter of 2010.”
He said land values for new housing increased by a nominal 14% y/y to an average of about R498,100 in the second quarter of 2010, compared with an increase of 7,1% y/y in the first quarter।
“In real terms land values increased by 9% y/y in the second quarter (up by 1,3% y/y in the preceding quarter)। The faster pace of year-on-year (y/y) growth in land values in the second quarter of the year is evident of improved residential property market conditions in many areas up to mid-2010.
“Along the coast, however, land values for new housing still experienced some downward pressure in the second quarter of the year, declining by a nominal 4,4% y/y and a real 8,6% y/y in the quarter। This brought the average nominal value of a coastal stand to a level of about R430,900 in the second quarter.”
More good news is that mortgage finance is now also a lot cheaper than two years ago.
Du Toit says commercial banks’ variable mortgage interest rate is currently 10%, which is at its lowest level since mid-1974।
“Moreover, as a result of the interest rate cuts over the last 18 months, monthly mortgage repayments are 28,7% lower compared with December 2008, when the mortgage rate was still 15,5%।”
Meanwhile, the Lightstone National House Price Index has continued its rising inflation path, reaching 8,3% in April 2010, up from a y/y inflation rate of 8,2% in March and 7,7% in February, it showed on Monday।
The lower inflation rate environment started feeding through earlier in the year, and while coastal properties provided something of a drag until February, those properties have caught up in April via a handsome rate of 8%। They were growing at just 5,3% in February.
The index showed an interesting turnaround occurred for Johannesburg properties as their growth dipped to 7,8% from 8,6% in March and after boasting the highest growth rates in the country for some time।
The best performing province in March was Cape Town at a healthy 9,8% click.
Affordable houses, though, ratcheted up by 14,7% from 12,6% as luxury home growth rates dipped to 7,6% from 8%.
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