Positive sentiment for the Buy-to-Let Market

Data availability for the rental market is far less comprehensive than for the home buying market in South Africa.

However, with what data we have it would appear that the fundamentals of the rental market may be improving, and this may lead to rental market strengthening in 2011.
During the property boom years, buy-to-let buying of residential property was taking place at a far greater pace, implying that the supply of rental stock coming onto the market was growing rapidly.

This appears to no longer be the case. In the 4th quarter FNB Estate Agent Buy-to-Let survey, buy-to-let buying remained at a lowly estimated 7% of total buying, unchanged for the 2nd successive quarter, a far cry from the estimated 25% back early in 2004.

This buy-to-let weakness comes as little surprise, with the household sector still under very significant financial pressure, as well as being highly-indebted, while banks' credit criteria remain conservative by the standards of a few years ago.

This not only constrains the supply growth in rental stock, but also keeps a greater number of would-be first time home buyers in the rental market for longer than would otherwise be the case, thereby supporting rental demand.

In addition, very low house price inflation means that our property-related real prime rate, i.e. adjusting prime rate for house price inflation, remains positive (+5.4% in December 2010). This curtails the short term speculative component of buy-to-let buying, where buy-to-let buyers are more focused on profiting through short term capital growth on property outstripping interest rates.

This form of buying is believed to have been far more significant during the boom years, where at one stage of 2005 the property-related measure of real prime rate was negative to the tune of -25.3%, a speculator's paradise.

Lower interest rates and a growing economy (albeit mildly) may have also brought about a better quality of tenant.

According to credit bureau, TPN, there has been a broad improvement in the quality of tenants since early-2009. As at the 1st quarter of 2009, only 71% of tenants on TPN's records were "in good standing".

During the 2nd and 3rd quarters of 2010, this percentage has risen to 82% and 81% respectively, the highest percentages since back in the 1st half of 2008 prior to the national recession. Yes, many tenants, like home owners, were also affected by recession and high interest rates back then.

The more recent apparent improvement in tenant quality also bodes well for an improvement in the rental market.

Not surprisingly, therefore, StatsSA rental estimates have started to show a rental inflation acceleration.

Given the lack of supply growth in rental stock, and reason to believe that significant financial barriers to entry to home ownership exist at present, it came as little surprise that we started to see an upward turn in StatsSA's CPI home rental inflation survey numbers.

Done on a 3-monthly basis, inflation in actual residential rentals rose from 4.5% in June to 5.6% year-on-year in the September survey. This represents a turnaround from a steadily de-celerating rental inflation rate since back early in 2009.

The initial rental inflation rise nevertheless points to a still financially pressured household sector, with "smaller being better", and thus the fastest rental inflation acceleration took place in the flats category (8.6%, up from 6%). By comparison, townhouse rental inflation measured 4.4%, moderately up from 4% in the previous quarter's survey, while house rental inflation was virtually unchanged from the previous survey.

Rental inflation rise in 2011 will be important for an ultimate recovery in buy-to-let demand.

A lack of buy-to-let demand in recent years especially through 2010, implying slow growth in rental stock, is crucial to our belief that we will see some acceleration in rental inflation through 2011.

In addition, given our expectation that consumer price inflation will gradually rise further through 2011, after 2 successive months of increase late in 2010, it looks increasingly unlikely that the SARB will cut interest rates any further for the time being at least, and sideways movement in rates through 2011 is anticipated.

This may put the brakes on 1st time home buying, keeping more would-be home buyers in the rental market and thereby supporting rental demand.

An expected rise in rental inflation in turn has 2 possible effects. Firstly, given very low expected house price inflation, we believe that gross yields on residential property will rise through 2011, and this is a key pre-requisite to larger numbers of investors returning to the market at some future stage.

Secondly, however, it can have the shorter term effect of contributing to rising consumer price inflation which could ultimately mean rising interest rates (although Firstrand only expects interest rate hikes to commence early in 2012).

In the 4th quarter 2010 FNB Estate Agent Survey an increased portion of the sample of agents expected an improvement in 1st quarter 2011 buy-to-let buying. This drove the FNB Buy-to-Let Confidence Indicator slightly higher to 0.065 (scale +1 to -1) from a previous quarter's low point of 0.045.

This is an interesting turn in estate agent sentiment after 5 previous quarters of deterioration.

In our own opinion, any noticeable improvement buy-to-let buying may take somewhat longer. However, we do believe that the fundamentals that ultimately drive the buy-to-let market, i.e. a stronger rental market and higher yields on residential property, should improve significantly through the course of 2011, setting the buy-to-let market up for strengthening at a later stage.

*John Loos is a strategist at FNB Home Loans

Rising from the Rental Market grave.....

Data availability for the rental market is far less comprehensive than for the home buying market in South Africa. However, with what data we have it would appear that the fundamentals of the rental market may be improving, and this may lead to rental market strengthening in 2011.

During the property boom years, buy-to-let buying of residential property was taking place at a far greater pace, implying that the supply of rental stock coming onto the market was growing rapidly. This appears to no longer be the case. In the fourth quarter FNB Estate Agent Buy-to-Let Survey, buy-to-let buying remained at a lowly estimated seven percent of total buying, unchanged for the second successive quarter and a far cry from the estimated 25 percent back early in 2004.

This buy-to-let weakness comes as little surprise, with the household sector still under very significant financial pressure as well as being highly-indebted, while banks’ credit criteria remain conservative by the standards of a few years ago. This not only constrains the supply growth in rental stock, but also keeps a greater number of would-be first time home buyers in the rental market for longer than would otherwise be the case, thereby supporting rental demand.

In addition, very low house price inflation means that our property-related real prime rate (i.e. adjusting prime rate for house price inflation) remains positive (+5.4 percent in December 2010). This curtails the short term speculative component of buy-to-let buying, where buy-to-let buyers are more focused on profiting through short term capital growth on property outstripping interest rates. This form of buying is believed to have been far more significant during the boom years when at one stage during 2005 the property-related measure of the real prime rate was negative to the tune of -25.3 percent, a speculator’s paradise.

Low interest rates and growing economy = better quality of tenant

According to credit bureau TPN, there has been a broad improvement in the quality of tenants since early-2009. As at the first quarter of 2009, only 71 percent of tenants on TPN’s records were "in good standing". During the second and third quarters of 2010, this percentage has risen to 82 percent and 81 percent respectively, the highest percentages since back in the first half of 2008 prior to the national recession. Yes, many tenants, like home owners, were also affected by recession and high interest rates back then. The more recent apparent improvement in tenant quality also bodes well for an improvement in the rental market.

Rental inflation accelerating

Given the lack of supply growth in rental stock, and reason to believe that significant financial barriers to entry to home ownership exist at present, it came as little surprise that we started to see an upward turn in StatsSA’s CPI home rental inflation survey numbers. Done on a three-monthly basis, inflation in actual residential rentals rose from 4.5 percent in June to 5.6 percent year-on-year in the September survey. This represents a turnaround from a steadily decelerating rental inflation rate since back early in 2009.

The initial rental inflation rise nevertheless points to a still financially pressured household sector, with "smaller being better", and thus the fastest rental inflation acceleration took place in the flats category (8.6 percent, up from six percent). By comparison, townhouse rental inflation measured 4.4 percent, moderately up from four percent in the previous quarter’s survey while house rental inflation was virtually unchanged from the previous survey.

2011's rental inflation important for buy-to-let recovery

A lack of buy-to-let demand in recent years, especially through 2010, implying slow growth in rental stock, is crucial to our belief that we will see some acceleration in rental inflation through 2011. In addition, given our expectation that consumer price inflation will gradually rise further through 2011, after two successive months of increase late in 2010, it looks increasingly unlikely that the SARB will cut interest rates any further for the time being at least, and sideways movement in rates through 2011 is anticipated. This may put the brakes on first time home buying, keeping more would-be home buyers in the rental market and thereby supporting rental demand.

An expected rise in rental inflation in turn has two possible effects. Firstly, given very low expected house price inflation, we believe that gross yields on residential property will rise through 2011, and this is a key pre-requisite to larger numbers of investors returning to the market at some future stage. Secondly, however, it can have the shorter term effect of contributing to rising consumer price inflation which could ultimately mean rising interest rates (although Firstrand only expects interest rate hikes to commence early in 2012).

In the fourth quarter 2010 FNB Estate Agent Survey an increased portion of the sample of agents expected an improvement in first quarter 2011 buy-to-let buying. This drove the FNB Buy-to-Let Confidence Indicator slightly higher to 0.065 (scale +1 to -1) from a previous quarter’s low point of 0.045.

This is an interesting turn in estate agent sentiment after five previous quarters of deterioration. In our own opinion, any noticeable improvement in buy-to-let buying may take somewhat longer. However, we do believe that the fundamentals that ultimately drive the buy-to-let market (i.e. a stronger rental market and higher yields on residential property) should improve significantly through the course of 2011, setting the buy-to-let market up for strengthening at a later stage.

Where are we in the Property Cycle?

As 2011 kicks off Adrian Goslett, CEO of RE/MAX of Southern Africa, takes a look at where South Africa’s property market is in the property cycle and what this means for homebuyers and sellers…

Cycles, a well-known phenomena in the world of economics, are evident in all economic sectors including the property market. These cycles are predictable long-term patterns that can be divided into three distinct stages known as boom, slump and recovery.

"The cycles are predictable in that booms are followed by slumps and then by a market recovery, which gives rise to the next boom as the cycle continues. The stages in the cycle are driven by various factors that affect the supply and demand equation in a particular market. In the property market, for example, supply and demand are driven by factors such as the interest rates, consumer debt-to-income ratios, the affordability of property and consumer confidence, among others," explains Goslett.

However, while predictable, these cycles are rarely regular, since the length and depth or intensity of each stage within each cycle are influenced by the particular confluence of driving factors and their effect on supply and demand.

The current property market cycle in South Africa provides a very clear example of how various factors determine the cycles.

"We experienced an unusually intense boom in the mid-2000s, with demand driven by a rapidly growing middle class with access to easy credit at low interest rates during a time of exceptional economic growth in South Africa. Property price inflation reached a peak of almost 25 percent, property sales were brisk and property development was robust. But in 2006 an unusually intense slump driven by an unusual confluence of factors emerged. Interest rates rose sharply, the implementation of the National Credit Act constrained lending and inflation soared as we entered a global and local recession, which negatively affected consumer confidence," notes Goslett.

As a result of the confluence of all these driving factors it became increasingly difficult for homebuyers to obtain credit and homeowners faced severe financial difficulties in meeting their financial obligations. Many of these overstretched homeowners tried to sell their properties and this, combined with the robust property development during the boom, created an oversupply of properties in certain sections of the market.

"This, coupled with the decline in demand driven by tight credit and affordability issues, saw the market enter a slump in which sales activity, house price inflation and new development slowed," explains Goslett.

However, recovery after a slump is inevitable.

"We have already seen the interest rates drop to historic lows, which, along with inflation back within target range, have also boosted general economic recovery. Lower interest rates, improved general economic conditions and the correction in house prices to more realistic levels have all led to an improvement in affordability. Sales activity is increasing as the banks slowly and cautiously start lending again, evidenced by improved approval rates of home loan applications. The supply and demand equation is beginning to balance again as the constraints on demand are lifted and already a shortage of properties is evident in certain areas. Given these realities, the South African property market appears to be firmly in the recovery phase of the cycle," comments Goslett

What does the property cycle mean to homeowners and potential homebuyers?

It is widely believed that the property cycle is a tool for "timing" an investment in property.

"That said, buying at the height of a boom and selling during a slump can result in a disappointing return on investment," says Goslett. He adds that the real fundamental lesson from the property cycle is that property is a long-term investment. "Excellent property returns are often only achievable if the property is held for at least a full property cycle, which generally stretches over seven to 10 years in South Africa," he says.

He says that while we are in for what may well be a long and steady recovery phase, property investors and homeowners can take comfort in the knowledge that the slump seems to have passed.

"Hence, we can expect a boom to follow. Although the boom is unlikely to be as intense as that of the early-2000s, it is sure to follow and will reveal to those who have held onto their properties during the recent and exceptionally tough slump phase that an investment in property remains one of the best long-term investments anyone can make," concludes Goslett.

The PROS and CONS of transferring Property from a Trust to your Personal Name

A significant new tax break which was granted by the South African Revenue Services on October 31 this year allows those whose residential properties are 'held' in companies, close corporations or trusts to transfer them, free of income or capital gains tax or transfer duty, into their own names or those of their beneficiaries.

The new law allows greater flexibility about the choice of the beneficiary - and it can be made use of until January 1 2013.

This new ruling should be made use of by as many people as possible because there is no logic in sticking to the old holding entities.

To hold a property in a trust, a close corporation or a company will automatically result in its eventually being taxed higher on capital gains when sold than if it were in the individual's name.

Furthermore, no concessions will be made for it possibly being the owner's primary residence. If the property is the owner's primary residence and is registered in his name, the first R1.5m will be exempt from tax.

The advantages of accepting individual ownership have been reinforced from the start of this year by the government's instituting an annual levy for the continued establishment of corporate entities. This could add significantly to the annual holding costs of such entities.

Under the amended law the person taking ownership of the property from a company must have lived in and used it primarily for domestic purposes from or before 11th February 2009. Furthermore, he must still be living there.

The beneficiary must also be a 'connected' person in terms of the Income Tax Act. This means that the owner himself and a relative must together have at least 20% of the holding company's shares.

If the property is being taken over from a close corporation, the other owner/partner can be another member of the close corporation or a relative of such a member - but in all cases the transfer will become invalid if steps are not taken to wind up, liquidate or de-register the company or close corporation within six months of the transfer of the property.

Similar rules apply to property transferred from trusts, but there the 'connected persons' concept has been extended to apply to any beneficiary of the trust or a relative of that person.

Where the original holding vessel has a more complicated structure, provision is made for unbundling this.

For example where a property is owned by a company, a close corporation or a trust, which is in turn owned by another corporate identity, or where the shares in the company are owned by a trust the beneficiaries of which live in the home, the new law again allows for the free transfer of the property from the company to the trust and then from the trust to one or more beneficiaries.

Again, the person to whom the property is transferred must have been using it as his primary residence for the stipulated period to qualify for the capital gains tax exemption.

Although the tax savings of a transfer to individual ownership are significant, the conveyancing fees will still be payable, as on any normal residential property transaction.

Furthermore, if a property is bonded,, the costs of cancelling the bond and registering a new one will have to be allowed for. It is possible that the new owner under today's stringent National Credit Act restrictions might find himself unable to raise a bond of the same size as the original - he might even be refused any bond.

This matter should be looked into before the transfer is affected.

*Lanice Steward is MD of the Cape Peninsula estate agency Anne Porter Knight Frank

UK commercial property an investment for South Africans

The continued recovery of the UK commercial property market, coupled with the strengthening of the rand relative to pound sterling, has presented South African investors with a unique opportunity to invest in the UK while capitalising on the recovery cycle.

This is according to Eric Mounier, CEO of the Pam Golding Properties/Athanor International Property Investments joint venture which markets direct offshore commercial property investments.

"Since 2000, the joint venture has been involved in property asset transactions valued at over R5 billion and currently is involved in supporting over 40 active property investments,he said.

Despite commercial property values in the UK being devalued by over 40 percent following the global credit crisis, the asset management team has been successful in ensuring all properties under management remain operational and income producing, and favourably positioned to take advantage of the expected recovery cycle.

Illustrating the UK commercial property market's recovery is the Investment Property Databank (IPD) UK monthly index, which indicated a 0.1% growth in un-geared commercial property values for the month of October 2010.

This growth concluded the 15th consecutive month of capital appreciation, bringing the compounded upturn in values since the recovery to 15.9%, according to the IPD.
While there had been significant growth during this period there was still a long way to go to get back to the values prior to the global credit crisis.

"This trend is supportive of the market commentary which indicates that investors are starting to re-enter the market, with the UK providing a popular investment destination.

During the period of downturn following the global credit crunch, the UK experienced a significant re-pricing of commercial property values, and as a result investors were taking advantage of the favourable prices which were now possible.

In addition, during the past year we have seen a significant strengthening of the rand against the pound with a slight reversal of this trend more recently, Mounier said.

For those taking the view that the pound was likely to remain strong against the rand and the euro, the timing seemed opportune to invest in a solid pound-related asset class, he added.

The aim of the Athanor/PGP JV is to facilitate property investments which derive the vast majority of their returns from the large net yields currently available as a result of the positive gap between the rental income and the cost of finance. "

Consequently, less dependence was placed on capital growth to achieve the expected return which reduced the risk associated with these investments.

As an example of such an investment, a recently launched property in Parkhouse West Industrial Estate in Newcastle-under-Lyme in Staffordshire, England, is expected to produce cash flow of around 11 percent per annum, from which a portion will be used to pay down the bank loan and the remainder available to return to investors.

The majority of the projected return will come from the annual cash flow," he said.

SA property falls in global rankings

The rapid deceleration in house price growth in recent months has seen South Africa slip markedly in the global performance rankings.

UK-based Knight Frank’s latest Global House Price Index shows that South Africa ended the third quarter of 2010 in 22nd place, down from 6th position in the second quarter.

UK-based Knight Frank’s latest Global House Price Index released earlier this week shows that South Africa ended the third quarter of 2010 in 22nd place, down from 6th position in the second quarter. Knight Frank tracks price movements in 48 countries across the world.

According to the latest index, South Africa managed house price growth of an average 3% in the third quarter. That is significantly down from the 14,8% recorded in the second quarter (year-on-year).

However, it’s not only South Africa where the housing recovery has lost steam. Liam Bailey, head of residential research at Knight Frank, says a number of countries have even tipped back into negative growth in the past three months. A total of 14 mainly European countries saw negative growth in the third quarter after they had experienced several quarters of rising prices.

Bailey says there is a growing gap between the less debt-afflicted European economies of Austria, France and Finland who rank in the top 10 and their neighbours to the south and west of the continent like Greece, Spain and Ireland who rank in the bottom 10.

The world’s top performing housing market in the third quarter was Latvia in Eastern Europe with growth of 26,1%. Ireland ended the third quarter at the bottom of Knight Frank’s global house price rankings with negative growth of -14,8%. The report shows that in Dublin declines of up to 50% have been recorded over the past two years.

Bailey says although there is some good news in that for the first time since late 2008 prices are rising in each of the six world regions -- Asia-Pacific is up 9,9%, the Middle East 5,1%, North America 4,2%, South America 3,5%, Africa 3% and Europe 0,8% -- the headlines don’t tell the full story.

Says Bailey: “Digging into the data we can see that there are still considerable issues playing out across global housing markets. While a majority of countries are reporting positive annual growth, 56% saw prices fall in the third quarter of this year.”

Bailey notes there is growing evidence that the global housing recovery, which began in early 2009 following desperate conditions in 2007 and 2008, may just be beginning to run out of steam. Nearly 30% of countries that experienced strengthening conditions in early 2010 saw quarterly price growth turn negative in the third quarter. - Joan Muller

Property Predictions for 2011 - South Africa

In 2011 the greatest challenge for the auction industry will be to refocus on a buyer's market still constrained with a shortage of demand and an over supply of non-income producing properties.

As the country gets used to a long, hard and bumpy recovery, the economic headwinds will still be strong and unemployment rates alarmingly high.

While the lowest interest rates in 30 years will boost sentiment and cause a bounce in properties with reliable cash flow, the favourable interest rate environment won't be a magic pill which quickly relieves the downturn.

Finding the right buyers at auctions and getting funding will remain challenging.

Business confidence will be dependent on a host of local and international issues; including fears of a potential sovereign debt crisis in Europe.

While distress at retail level may slow with lower interest rates, and banks now well geared up to assist defaulting clients, corporate distress will grow with larger liquidations bringing higher value assets to the auction floor.

High value bankruptcies will increase throughout the year, presenting opportunistic purchasing like never before seen in South Africa.

As liquidators and banks get more desperate to offload bad debts and an oversupply of development land, a sweet spot will emerge for investors with access to financing as they pick up these assets at bargain prices.

The residential property market will remain flat for most of the year with a stronger recovery at entry level. Investors will snap up properties below R1 million, which for the first time in many years will provide stronger returns than cash in the bank.

The middle market will remain flat for some time as it deals with oversupply in newer residential areas.

The luxury residential market across the country will remain weak all year, with little help from interest rates, and a strong Rand constraining international demand.

Leisure residential properties at the coast, on golf courses and in other non-urban areas will also remain flat with many properties being sold at auction below replacement value.

Next year two pieces of legislation may have a major impact on the auction sector. The Consumer Protection Act will change a wide range of issues regarding the auction process, mandates and sales processes; these are all designed to look after the consumer's interests.

The new Companies Act will also have a material effect with the introduction of Business Recovery.

This may cause an initial slowdown in liquidations as companies go through the business recovery process.

It is possible that liquidations may increase later in the year as banks rush to secure their positions on property exposures. Either way, it will have a material impact on the auction sector.

The commercial property market will become two-tiered; good properties with strong covenants and reliable cash flow will experience a surge in demand as investors look to place their cash in areas that achieve greater returns than bank deposits.

Blocks of flats, retail property and key industrial sites will form the strongest part of the market.

The office market will remain mild but A-Grade properties in prime locations will attract strong demand on the auction floor.

An area of concern will be hotels, guest houses and leisure resorts which will battle in 2011 and may hit the auction floor with little demand.

Foreign buyers now few and far between.....

There was a time two or more years ago when residential property estate agencies, some with international connections, earned considerable kudos by publicising impressive figures on the number of foreign buyers to whom they had sold South African property.

That time, says Bill Rawson, Chairman of the fast expanding South African property group that carries his name, is now by and large past.

"At present I regret to say we are just not seeing foreign buyers in territories like the Western and Southern Cape where their presence previously - and their ability to buy in the more expensive brackets - very definitely did help to keep prices up."

Sales of upper bracket homes, adds Rawson, have been the hardest hit by the recession and the lack of overseas buyers here has been felt in this sector to a far greater degree than elsewhere.

In the circumstances, he says, the government's investigation some years back into the impact of foreign buying had become almost irrelevant today.

"Those who have had to sell in the upper brackets have been forced to accept fairly drastic price cuts," says Rawson. "For example, a seven bedroom Constantia home originally on the market at R17 million was knocked down recently on auction for R10 million.

"However, it is also true that in this market there are relatively few distressed sellers and those planning to sell are often able to sit back and wait for better times. Prices in areas like Constantia have, therefore, remained fairly satisfactory."

Buyers in South Africa who are not adopting a wait and see attitude (as some are), says Rawson, are currently getting exceptionally good prices - for which, he is convinced, they will later be grateful.

"This applies particularly, I think, to those buying currently in Rawson Properties' three “academic belt” (Rondebosch) multi-unit projects - Rivers Edge, Rondebosch Oaks and The Rondebosch. Buyers here are taking up units at the same pace we saw in the boom years."

Investors, says Rawson, have in recent months been able to arrange bank finance far more easily and at better rates than was possible earlier this year - "and it looks if the trend will continue".

Commending Dr Andrew Golding and his research team at Pam Golding Properties, Rawson says that their publication of the best areas in which to invest is "exactly the sort of information buyers and the whole industry needs. It will very definitely facilitate investor decision making".

The report, says Rawson, once again shows the importance of close proximity to good schools and efficient transport systems as well as upper bracket retail areas. It also emphasises the absolute necessity of increased security for private homes.

A further finding of the report, which, says Rawson, is particularly important and which has reinforced the long-held convictions of many Capetonians, is that the Southern Suburbs of Cape Town have been and are likely to remain the safest and steadiest appreciating place in SA to make a long term property investment.

Reserve Bank cuts again, but will it matter?

Last week, Reserve Bank governor Gill Marcus announced yet another rate cut, bringing the repo rate down to 5।5% and prime down to just 9% - the lowest rate the country has seen since 1974.

The move was not unexpected. Inflation has been close to or within the 3-6% target range for about a year (see chart) and has for several months surprised on the downside, while growth remains somewhat feeble, as illustrated by recent weak manufacturing data. In addition, the rand continues to display Schwarzenegger-like strength against the dollar (see chart), and, as Ireland teeters on the verge of a debt meltdown, the global economy looks more and more risky.

Against this backdrop, then, the decision to cut rates was not a surprise। It is an open question, however, whether or not the cut will have the kind of beneficial economic effects that many hope for.

In general, rate cuts tend to have two stimulating effects on the economy. First, they encourage households and businesses to borrow (and hopefully spend and invest) more, and second, they tend to weaken the currency and thus to stimulate exports. But will either of these things come to pass in South Africa, given the current context? Let's look at each in turn.

It's highly questionable whether the latest rate cut will have much effect on consumer or business borrowing.

On the consumer side, people just don't have much capacity to borrow. As the FNB Property Barometer noted last week, "The most recent Reserve Bank Quarterly Bulletin indicates that household levels of indebtedness remain stubbornly high, with the debt-to-disposable income ratio for the 2nd quarter (of 2010) at 78।2%, not far below the all-time high of 82%.

This would suggest that households as a group are not able to aggressively grow their borrowing off such a high base."

Given this, it's unlikely that the latest rate cut will boost borrowing; more likely, South Africans will try to pay down their debt as their monthly repayments decrease.

This isn't written in stone, of course। After all, last week's retail sales numbers showed that sales rose by 0.4% month-on-month in September, and 6.1% year-on-year. This growth soundly beat analysts' forecasts of around 4.7%, and suggests that South African consumers are still willing to spend.

But being willing to spend is not the same as being able to borrow and it looks like South African households are still too deep in hock to think of taking on more debt just yet। Backing up this view, last week's FNB/BER consumer confidence index reported a slight fall in the fourth quarter. Overall the index has been stuck between 14 and 15 this year, suggesting that consumers are no more upbeat now than they were at the beginning of the year, and making major new borrowing unlikely.

On the business side, there's nothing to suggest that South African businesses will borrow more at lower rates। Businesses borrow primarily when there are opportunities available for them to profitably invest in, and the current climate of uncertainty is not encouraging of such investment.

When it comes to weakening the currency, it's again not clear whether or not the rate cut will help. There's no doubt that the government is keen to see the rand weaken against the dollar; finance minister Pravin Gordhan announced measures to weaken the currency during his recent Budget speech, including further exchange control relaxation and the further accumulation of foreign exchange reserves, and economists have speculated that a general push to weaken the rand was behind last week's rate cut, although Marcus was adamant that this wasn't the case।

Either way, however, it seems very unlikely that South Africa can actually do much about the level of the rand. As Marcus noted, "Since the previous meeting of the Monetary Policy Committee [in September], the rand has appreciated by over 3% against the dollar. This has been despite lower domestic interest rates and the higher pace of reserve accumulation."

In large part the problem is that even after 650 basis points in cuts, South Africa's interest rates are still high by global standards (see table), and will doubtless continue to attract hot money (foreign money from investors looking for better yields), which will keep the currency strong।

In addition, a lot of rand/dollar volatility is actually just dollar/euro volatility in disguise, and so events in the US and Europe, which South Africa can do nothing about, are often the major drivers of the currency। Overall, then, it's unlikely that a 50 basis-point cut in domestic rates will have much effect on the rand.

What, then, can we conclude about the latest rate cut? While the reasons behind it are obvious, solid, and sensible, it remains an open question whether or not it will pay off। Given current circumstances, there seems to be no easy way for the cut to boost the economy through currency weakness or increased borrowing. Only time will tell if we can cut our way to faster growth.

Write to Felicity Duncan: felicity@moneyweb.co.za

*This article first appeared in Discovery Invest

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.