Threats to SA's Property Market

PRETORIA - Steep increases in municipal rates, electricity and service charges will be one of the factors to watch in the property market according to Absa's senior Property Analyst Jacques du Toit. This and possible increases in interest rates were two of the potential threats to the property market in the coming months.

Du Toit recently addressed the 2010 ARELLO District 6 meeting in Sandton about the prospects of the local housing market going forward and said it was unlikely that the property market was heading for a boom, despite the recent recovery in house prices. The Association of Real Estate Licence Law Officials (ARELLO) is an international organisation and South Africa forms part of ARELLO District 6, which consists of non-American countries.

In a post-conference interview with Realestateweb, Du Toit said he expected the recovery in the housing market to be gradual and dependent on the income position of households. "Debt levels are high. There have been job losses and large scale unemployment during the course of 2009. Also in the first quarter of 2010 the latest figures from Statistics SA show that there has been another round of job losses. This has an impact on the disposable income of households and while this situation persists the property market will remain under pressure."

Unlike some analysts Du Toit doesn't believe that we are headed for a double recessionary dip, but cautions that the situation in Europe may have a macroeconomic spill-over, which will impact on South Africa. "At this stage it doesn't look like this will have a major effect on South Africa, but as far as house price growth is concerned we are expecting somewhat slower year-on-year growth in the second half of 2010."

Du Toit notes that the leisure market has been slow to recover and that the coastal market has remained sluggish because of that. This however may present opportunities for investors who are looking for "good buys".

A hike in interest rates may also become a factor in the second half of 2011. "We feel that is when inflationary pressures will start to escalate, especially due to electricity and other service hikes and government may increase interest rates in an effort to curb inflation."

We asked how big an impact he expects electricity and municipal rate hikes to have on homeowners: "I believe this is going to play an increasing role in the choices prospective homebuyers make in the future. We'll be seeing major hikes in electricity and the resulting impact on the cost of running a household. There is also the issue of increasing rates, and buyers will take this into account when deciding on a property."

YDL Investment Property CEO Anton de Leeuw agrees with Du Toit's analysis. "From an investment perspective there has been a significant drop in the buy-to-let market. Investors are worried about returns and they are worried that prices may contract even further. What we've found with our client base is that there has been a significant shift to buying distressed properties, where properties are bought at substantial discount to market value. "

De Leeuw says despite the difficult market conditions their investors are still looking at average yields of about 10%, but agrees that profits in the property market are to be made in the long haul, as quick turnaround speculative profit opportunities are becoming harder to come by.