Editor of IP Magazine
stuart.murray@pamgolding.co.za
Stuart Murray is co-founder
and former editor and CEO of
Finance Week Magazine
Which is best – buy or build?
- September 6 2010
Due to a number of market factors, it was 23,5% cheaper to buy an existing house than build a new one in the second quarter of this year, says Absa Bank. So basically, if you were to build a home that you could buy at market value for R2 million, it would cost nearly half a million rands more.
Although the residential building and construction sector is going through tough times, cost increases – mainly wages and transport – continue to rise.
Moreover, land values have increased substantially, up by a nominal 14% year-on-year in the second quarter of 2010 compared with an increase of just over 7% in the first quarter. Along the coast, however, land values slowed further, declining by a nominal 4,4% y/y and a real 8,6% (plus inflation) y/y,
In terms of affordability, availability of finance and the burden of repayments are both restricting growth in the housing market. Interest rates have remained unchanged since the last rate cut in March this year, when rates were lowered by 50 basis points.
Commercial banks’ variable mortgage interest rate is 10%, which is at its lowest level since 1974. As a result of the rate cuts since June 2008, when the mortgage rates was 15,5%, monthly mortgage repayments are 28,7% lower. However, growth in credit extended to the household sector , comprising instalment sales credit, leasing finance, mortgage advances, credit card debt and other loans, has shown very little growth this year – a reflection of households’ financial position improving only gradually.
Are mortgage bonds getting any easier?
- July 22 2010
Yes, they are. The “feel good” sentiment generated by the Fifa Soccer World Cup seems to have permeated the banks. Lending restrictions in June were relaxed further and the number of 100% loans increased. Furthermore, the number of loans turned down by one lender but approved by another also increased. Leading bond originator ooba’s price index rose 6.8% year-on-year in June. Ooba’s Saul Geffen comments: “We have seen a sharp recovery in house prices… with three months of double digit year-on-year house price growth between February and May. Prices continue to increase, albeit at a slower pace.”
According to other indicators tracked by the oobarometer, the growth in the average purchase price among first time buyers remains steady, with year-on-year growth of 12,1% in June. Also, the average purchase price among first time buyers increased 14,3% in June. The average deposit as a percentage of purchase price was 17%. The average decline ratio increased marginally in June, up 1,3% y/y to 48,8% from 47,5% a year earlier. This, says ooba, was due to the higher proportion of 100% loans in June. The increase in the number of applications turned down by one lender and approved by another is good news for the housing market, says Geffen. “It indicates a higher probability of a loan approval from another bank even if initially declined. It also demonstrates the importance of shopping around.”
Is the economy coming or going?
- May 26 2010
The South African economy seems to be on a sustainable recovery path from the recession. Interest rates are at their lowest for decades and inflation is under control. According to Stats SA, April inflation dropped to 4,8% year on year from 5,1% y/y in March. Monthly consumer prices slowed to 0,2% in April from 0,8% in March.
However, we still have to feel the effects of the upcoming administered price increases such as Electricity tariffs, municipal rates and charges and fuel prices. But just as worrying is the current flood of wage demands and awards, most considerably higher than inflation. They amount to economic suicide.
Inflation is expected to turn upwards from the final quarter of this year, but this is unlikely to influence interest rate decisions by the SA Reserve Bank’s monetary policy committee meeting on July 22.
We could nevertheless benefit from lower interest rates ( they would certainly help improve the residential property market further), but these are being kept high by the excessive labour demands and by excessive tax increases. Stricter public sector governance and more realistic demands from labour movements would help. Some analysts believe that prime rate could have been lowered to 7%-8% instead of the 10% we seem stuck with.
Now we are facing Euro-contagion, causing markets to slump and once again raising fears of yet another global financial crisis. On the other hand, we might as well just sit tight and let it blow over. After all, we are the richest endowed non-energy commodity producer in the world. We should remember this more often.
Will the rand stay firm or start weakening?
- April 30 2010
The rand strode forward at a gallop as April trading came to a close. Good news for importers; more gloom for exporters. Nice if you’re holidaying abroad.
The latest news from the Fed was that it would hold US interest rates on hold – which means near zero. And this bolsters the rand. US interest rates offer no return on cash, encouraging capital outflows. South Africa has enjoyed a positive tsunami of money for the past five or six years – other than during the global financial meltdown. The “carry trade”, as it is called, is back on track now. At R7,34 to the dollar many consider the currency overvalued. But the impact of a strong rand has its upside; it helps suppress inflation for one thing and this gives the SA Reserve Bank scope to further cut interest rates. An additional sweetener for the Bank is the fact that inflation continues to fall below its upper target of 6%. In March consumer inflation dropped to 5,1% from 5,7%.
What may stop the rand’s vigour is the fact that US economic data suggest reasonable growth prospects and corporate earnings have improved . This is supporting the dollar. The debt mess in Europe is also making the US a more attractive investment risk arena. European currency and bond yields are under pressure.
Some economists believe the rand could strengthen to below seven to the dollar. It also has firming potential against the euro, with sterling remaining in the 11 to 12 band.
If the residential property market is picking up, who’s buying?
- April 21 2010
As a percentage of total buying over the first quarter of this year, the black population comes out tops. House prices rose again in March, with the “small house” segment leading the field. In this category, according to Absa Bank, the average nominal value was up by 9,6% year-on-year. In contrast, medium-sized house prices rose by 4,2% y/y and those of large houses increased by 5,3% y/y.
This suggests that middle income earners are still struggling with high debt levels and are finding it difficult to get mortgage bonds. The lower income groups appear to be in better shape.
First National Bank, which reported an 8,6% average house price inflation for March, comments that Black population groups below the R500k income level are having a profound impact on the market below the R1million price mark. This is where we are seeing the significant increase in black buying. This group is less indebted than their white counterparts and, says FNB, black buyers have room to grow their borrowing at a significantly faster rate than the other population groups.
In an environment where job creation and income growth are flat, the gap between income groups is narrowing. This is where the black population in the income bands below R500k becomes important for residential demand.
Last word from FNB: “We could see this group providing an important pillar of support for the housing market in 2010.”
With the residential market improving, is it time to start investing in property?
- April 10 2010
Although the market has turned the corner, interest rate cuts are taking time to impact, and this includes the latest 50 points reduction. As a result, the current buying uptick is almost exclusively focused on primary residences (ie. buying to occupy).
The buy-to-let market has fallen to less than 10% of total buying, which is the lowest point in the last six years. Confidence in this segment of the market has declined for the last two quarters, according to First National Bank’s latest survey of estate agents.
For many would be investors, the problem is having to fund the difference between rental income and mortgage bond repayments. This is unattractive, particularly when the outlook for real capital appreciation is so uncertain. The FNB survey estimates that on average only 65% of bond repayments are covered by rental income.
The current situation also applies to other non-primary residences, such as holiday homes, and coastal properties are lagging the general upturn.
However, there is one positive sign and that is the fact that the sharp drop-off in the building of new houses and developments is steadily reducing the over-supply situation and this will lead to an upturn in values.
How will the latest interest rate cuts
Help my bond repayments?
- March 29 2010
The Reserve Bank’s 50 basis points interest rate cut surprised the market but, for a change, it was a pleasant surprise. It takes the prime rate to its lowest level since 1981.This benefit however will not make a huge impact on monthly repayments; the important effect will be the boost in confidence that the Bank’s apparent change in direction will have on the consumer and the market as a whole.
The following are brief examples of the monthly repayment savings on 20-year mortgage bonds:
| Bond | Interest 10,5% | New interest 10% | Saving |
| R500 000 | R4992 | R4825 | R167 |
R1 million |
R9984 | R9650 | R334 |
R1,5 million |
R14976 | R14475 | R501 |
| R2 million | R19968 | R19300 | R668 |
The interest rate reduction was not the only good news. The Consumer Price Index (CPI) dropped to 5,7% in February – below the upper range of the Reserve Bank’s target of 6%. The CPI is expected to drop further in coming months as the country’s economic recovery continues, and the Bank has upped it GDP growth forecast for 2010 to 2,6%.
The real benefit will derive from a more positive attitude from the banks towards bond applications for new mortgage loans. They have relaxed their lending criteria to some extent, but not sufficiently to help the market to really take off.
And can we expect further cuts? Most analysts reckon the best we can hope for at present is that prime will stabilise at this level. But we could all be in for a surprise.
Is the South African residential
property market really taking off?
- March 25 2010
Pam Golding Properties’ Stuart Murray provides some background to the steady improvement in house sales and activity.
Since the country eased out of recession last October, the market has more or less groaned its way out of the housing slump. Consumer confidence is re-emerging, banks are slightly more willing to approve mortgages, and market forces have brought asking and offer prices closer together.
We are still along way behind the halcyon days a few years ago when house price growth topped 30% a year, but the tide has definitely turned. Mortgage originator Ooba reported an average increase in nominal house price inflation of 11,4% in February – the ninth consecutive monthly rise, according to its barometer.
Other helpful indicators include a more lenient attitude by banks. The average approved bond size year-on-year has increased by 13,9% and the average deposit required has fallen by 8,9%. Disappointingly, there has been little change in the banks’ decline ratio. But borrowers should still shop around. Ooba discloses that the ratio of bond applications declined by one lender and approved by another lender has also risen.
Another phenomenon of a stimulated market is the growing appearance of “hot spots”, where market activity is well beyond the national average. Cape Town is a case in point. First National Bank’s property barometer shows that demand activity in the Western Cape is up 28,4% y/y. Agents, the bank adds, are upbeat. Areas such as the upmarket southern suburbs – Constantia, Bishopscourt etc – and the Atlantic Seaboard, Waterfront have bounced back. In Bantry Bay, PGP has a 1000 sqm luxury home on the market for R85 million.
Building confidence
- March 15 2010
Further positive signs that the residential property sector continues on its upswing come from two important economic indicators, the SA Reserve Bank Leading Business Cycle and the FNB Building Confidence Index.
The Reserve Bank indicator in February continued to show an acceleration in its growth rate, which bodes well for the residential mortgage market as it tends to show that new mortgage loan grants are increasing. The indicator has a strong focus on the manufacturing sector which has shown some improvement as a result of global economic recovery and a need to re-stock. Positive economic growth in SA is expected this year, possibly as much as 3% - which will be a wonderful confidence stimulus considering that the country only emerged from recession last October.
FNB’s building confidence index measures the confidence of all the major role players in the building industry including architects, quantity surveyors, contractors, sub-contractors, retail merchants and manufacturers of building materials. The index is compiled quarterly from surveys undertaken by the Bureau for Economic Research in Stellenbosch.
Of the six sub-components of the index, four registered a rise, the steepest being that of architects.
FNB comments that the results indicate that the upswing in the residential sector is under way. However, the tempo of the revival is currently constrained by factors such as uncertainty about economic prospects, high levels of consumer debt and tight lending criteria – although less restrictive than a year ago - which tend to disqualify many marginal borrowers.
The index is also seen as evidence that some property developers are dusting off plans and considering new projects.
Growing older
- February 24 2010
In spite of a falling life expectancy – due mainly to the HIV/Aids pandemic – South Africa is in the early stages of the global ageing population trend. Demographics from IHSGlobalinsight show that the age band 0-4 years is less than the bands just above it. The 20-29 year-old age bands grew by 17,2% over the 10 years 199-2008 while by comparison the 65+ age group grew by a much more rapid 28% over the period.
The trend has far-reaching implications for the housing market where current focus tends to be on the young first-time buyer segment. More research is needed into the housing pattern of retirees. Do they sell their homes and downscale, or retain them for their children to inherit? Can they afford to remain in the family home? Consider that living on a fixed income can be a one-way ticket. With inflation at 6% the cost of living doubles in 12 years.
Some countries have “equity release” programmes through which financial institutions “purchase” homes owned by elderly couples, paying them lump sums to help with living expenses, but allowing them to remain in occupation, rolling over the interest until such time as one or both pass on. The problem is that “equity release” only works well when property prices are rising and interest rates are low. In South Africa, Nedbank introduced a similar scheme without any real success.
In the UK, where there is a national old age pension, the ageing population syndrome has forced the government to increase the pensionable age for men from 65 to 70 years and for women from 55 to 60 years.
FNB’s property strategist John Loos says that such demographic changes, along with affordability issues, have led to an increasing need for more smaller sized residential units.
Commercial Gloom
- February 16 2010
The property crunch has not only affected South African homeowners, the commercial property market is also facing hard times. The realisation in October last that the country has come out recession (barely) has helped lift spirits, but to no great extent.
All three of the country’s commercial sectors – office space, retail and industrial – have suffered, although there have been a couple of geographical bright spots, as there has been in the residential market.
The real estate sector on the JSE, which had such a good run through most of 2008/9 is also in maudlin territory due to slowing income distribution growth brought about by increased vacancy levels.
By December’s year end, office vacancies had risen alarmingly. On average as much as 8% of prime office stock stood empty in the decentralised nodes of Cape Town and Johannesburg. There was considerable variation in Johannesburg, with vacancies ranging from 3% in Randburg to as high as 16% in Rivonia, according to the Rode Report. In Pretoria, the highest vacancy rate was in Hatfield, with 7%.
Interestingly, office vacancies in decentralised Durban have remained the most resilient to the weak economic conditions, with vacancies for prime office space ranging between 2% and 4%.
Cape Town’s situation, says Rode, is largely as a result of high vacancy rates in Claremont (17%) and Century City (12%).
Industrial vacancies also continue to increase, averaging between 3,5% and 8,2% and this, naturally has meant that industrial rentals have fallen in many areas. Worst hit have been Durban (-5%) and the West Rand (-16%). The East Rand, on the other hand showed growth of around 5%.
And the outlook for listed property? Catalyst Fund Managers’ February report reckons that the sector still provides an attractive initial income yield relative to cash and bonds.
Gaining Momentum
- February 5 2010
The steady improvement in the South African residential property market continues, albeit at a slow pace. Year-on-year price inflation rose by 3,1% in January, the third consecutive month of price inflation.
In real terms, however, that is taking consumer inflation into account, house price decline is around –3,8%.
So, as FNB’s property strategist John Loos puts it, “we are not out of the woods yet”.The bank cautions that the growth rate remains very weak. According to its Property Barometer survey of estate agents, results relate to an oversupply of residential property which is sustained by unrealistic pricing by sellers. Standard Bank’s median house price index for January also indicates a slow but steady improvement in the property market. Prices, however, based on residential properties financed by Standard and adjusting for consumer inflation shows a steeper decline than that of FNB.
Good news is that according to Standard over the past couple of months there has been a sizeable increase in the number of loans granted. The banks adds: “Also encouraging, it appears that first-time buyers are showing interest in the housing market, while the loosening of the loan-to-value restrictions is increasing demand for lower priced properties.” The bank suggests that the market as a whole will turn positive by the second quarter of this year.
Absa predicts that the growth rate of mortgage advances will rise gradually during the year and, based on its calculations, property market activity and transaction volumes have bottomed and are rising at a steady pace.
Split Decision
- January 27 2010
By Stuart Murray
The decision by the SA Reserve Bank not to further cut interest rates raises some interesting issues – not the fact that its monetary policy committee decided to hold the repo rate (the rate at which commercial banks borrow from the SARB) at 7% - which was generally expected - but that the decision was far from unanimous.
Former Governor, Tito Mboweni, seldom if ever gave any information as to the committee’s deliberations, but the new Governor, Gill Marcus, admitted that at this week’s meeting a number of members held strong views that the repo rate should be cut further. What we don’t know is: how many wanted a cut? Were those in favour of cuts outvoted, or simply overruled?
For many years now there has been a strong lobby pushing for the Reserve Bank to publish the monetary committee deliberations, as is done by the US Federal Reserve Bank and the Bank of England. In this era of much vaunted transparency this clearly should be done. But will it ever?
Another interesting talking point emanating from the post-meeting Press conference, was that Marcus was adamant in explaining that the core function of the Bank was to counter inflation. “that’s the purpose of any central bank in the world,” she said, adding that it was time the public was made aware of this.
Yet I recall a number of previous Governors stating categorically that the function of the South African Reserve Bank was to protect the currency.
Are the two clearly indivisible?
Towards the end of this month, the SA Reserve Bank’s monetary policy committee will hold its first meeting of the new year. Among its many deliberations will be whether to hold or further cut interest rates. Whatever the decision, the pronouncement will hold the key to monetary policy this coming year. It will also have a major impact on the housing market.
Currently, the household financial and debt situation is slowly improving and this will continue as long as interest rates remain relatively low. There are positive signs that the economy is picking up; inflation is back within the Bank’s target range of 3%-6%, and activity has returned to the property market. However there are problems. These include poor services delivery, job losses, a stubborn prices and incomes gap, and a widening current account deficit which affects the country’s credit rating. Furthermore, the rate of savings among South Africa’s households remains poor, reflective of the recent pressure on disposable income, all of which has impacted negatively on real residential fixed investment.
The monetary authorities are, of course, under heavy political pressure, particularly from the trade unions, to cut interest rates further and thus, it is argued, weaken the rand and improve the competitiveness of our exports. Lower rates will help households and give a boost to the housing market. But is a weaker rand really the answer??
Perhaps those calling for this action might consider an alternative. Improved productivity seems a well-trodden global path to competitiveness.
Positive signals
- December 14 2009
The steady global recovery in house prices is continuing with Israel leading the way, according to a UK report. Australia is not far behind and – the good news – South Africa is in 15th place, just behind China.
The collapse of the property market in Dubai has rocked the international boat.
Residential prices there have fallen by 47% over the past 12 months, although there are now signs of a slight recovery. Positive signs in South Africa include easier bank lending, which has been a major brake on residential market activity. FNB reports that the value of new residential loans granted is steadily nearing a return to positive year-on-year growth. And South African Reserve Bank figures show that the value of residential grants in September was more than double that of January.
The focus of growth in residential loans has been mainly on existing properties, leaving the development market in the doldrums. Any noticeable increase in building loans is only anticipated in the second half of 2010. The commercial market for mortgages is also showing signs of recovery. The three main commercial sectors – retail, industrial and office space – have all showed significant deterioration in performance since 2008. In general terms, a positive sign is that, according to the SARB’s quarterly bulletin, the household financial and debt situation is gradually moving towards a more healthy position. This recovery, however, will depend on keeping interest rates low. The declining level of consumer inflation will support this.
Fuel for thought
- December 5 2009
Almost without a murmur, South Africa’s consumer inflation has fallen within the Reserve Bank’s inflation target of 3%-6%.
The October Consumer Price Index (CPI) came in at 5,9%, down from 6,1%in September and massively below the 13,7% in August last year.
Further good news is that the Producer Price Index (PPI), which feeds into the CPI, fell by more than 3,3% year-on-year in October. Overall, South Africa has now officially moved out of recession.
All this bodes well for the medium-term consumer inflation outlook and technically this should be furthering the case for a further cut in interest rates – and thus giving the housing market a welcome boost.
But there are hurdles ahead. Probably the biggest imponderable is the oil price which has been steadily rising as the northern hemisphere moves into winter. And fuel plays a major role in the CPI, whose weighting basket was changed from January this year when Stats SA streamlined the number of products and services used to compile the index from well over 1 000 to 386.
In doing so, fuel was given a much bigger weighting in the new basket. So any increases will affect consumer price inflation quite severely. We are just about to get another price increase in basic fuels of around 30 cents a litre. More may be in the pipeline.
The effect may well give the Reserve Bank’s monetary policy pundits the collywobbles to which they are so prone – knocking chances of further interest rate cuts on the head.
Watch the oil price!
Open cards, please
- November 25 2009
The new governor of the South African Reserve Bank, Gill Marcus, has the opportunity now to open the door on the Bank’s monetary policy deliberations, currently the focus of intense debate and criticism.
The Bank has cut its repo rate (at which it lends money to commercial banks) by a cumulative 500 basis points since last December under former governor Tito Mboweni, leaving the prime/mortgage rate at 10,5%. But at its last two monthly meetings, the repo rate was left unchanged, increasing the likelihood that the downward interest rate cycle is over and giving rise to fears that rates will start to rise again next year. This is bad news for homeowners and for consumers in general who face rising debt-to-income levels.
The trade unions are furious. Faced with increasing job losses and a wilting economy they, and some heavyweights in the ANC, want rates reduced by at least another 3%. Exporters too, particularly in the mining sector, want lower interest rates which they contend will weaken the rand – which has appreciated 28% against the US dollar this year. Many economists dispute this theory. As a result there is a growing clamour for the Reserve Bank’s mandate to be reviewed. But as the country’s monetary policy authority its job is to target inflation and to protect the rand. The issue of jobs and reviving the flagging economy is a fiscal matter.
Marcus says the Bank is willing to hold discussions with its critics. What would make matters less complicated would be if the deliberations of its policy committee were made public, as do some other central banks. Then all parties would have a basis for debate.
New referee Gill Marcus stamped her authority on South Africa’s monetary policy this week when she announced the Reserve Bank’s decision on interest rates. No change, she said, leaving the Bank’s repo rate (at which it lends money to commercial banks) at 7%.
The message was firm: the Bank will continue to follow its mandate of inflation targeting in spite of the clamour from the ANC, the trade unions and exporters – mining in particular – and other interested parties such as the SACP, to cut interest rates and thus, potentially, weaken the rand. This, they claim, will help kick-start our flagging economy. A new voice is that of highly-respected business heavyweight Cyril Ramaphosa, a member of the ANC’s national executive committee, who called for the repo rate to be cut to 5%. Trade union organisation Cosatu, which has long called for lower rates, recently told Parliament that the repo rate should be as low as 3%.
The commercial banks set their prime rate 3,5 percentage points above repo, so current bank prime lending rate is 10,5%. Former RB governor Tito Mboweni, who stepped down last month and was replaced by Marcus, has criticised the banks’ margins as well as the fact that they determine these margins in unison.
Announcing the Reserve Bank’s no change decision, Marcus acknowledged the growing call for its mandate to be reviewed and broadened to include economic growth and job creation.
Meanwhile, most economists have welcomed the RB’s stance as indicating institutional continuity, which will be welcomed by financial markets.
Global Therapy
- 10 November 2009
There are now definite signs that the global collapse of residential property prices following the international financial meltdown has bottomed and, in some instances, prices have begun to rise again.
Taking up the cudgel
- 26 October 2009
The departure of SA Reserve Bank governor Tito Mboweni after 10 years as chief guide of the country’s monetary policy was hardly a climatic event; not quite with a whimper, but certainly not with a bang. This was in noticeable contrast to Mboweni’s recent castigation of the retail banks’ high charges amid allegations of uncompetitive behaviour.
There has been little follow-up to the bankers’ cries of indignation other than the announcement of yet another investigation. Mboweni questioned, not for the first time, the gap between the Reserve Bank’s repo rate (the interest it charges commercial banks) of 7% and the banks’ prime lending rate of 10,5% - and the fact that all the banks use the same benchmark.
Perhaps the incoming governor, Gill Marcus, will take up the cudgel. Otherwise the issue will fade away once again.
The current dearth of mortgage finance is a negative force in resurrecting the residential property market. But combined with the strict lending criteria which the banks impose is the fact that consumers are paying higher mortgage interest rates than they were a few years ago. The banks are now saying that they have been loosening the pursestrings and that the granting of 100% bonds has been gaining momentum. But as Pam Golding Properties Western Cape boss Laurie Wener points out, “albeit to those who need it least.”
Affordability, of course, is a serious issue as household indebtedness remains stubbornly high and disposable income slides. And the problem applies not only to South Africa. UK media reports reveal that access to mortgage finance is almost unobtainable, especially to first-time buyers, and that the difference between a 10% deposit instead of 25% can mean an additional 2% on interest charged.
Up, up and Away?
- 15 October 2009
Indications are growing of a turnaround in the residential property market, especially in high value areas such as Cape Town’s Atlantic seaboard, where the Pam Golding Property Group is marketing a record-price R100 million home.
First National Bank reports that its confidence indicator has risen every quarter this year and looks set to continue the trend. The bank suggests two reasons: that the benefit of lower interest rates is taking effect, and that the financial institutions are relaxing their lending criteria for mortgage bonds.
Mortgage originator, ooba, says that according to its index house prices have risen steadily over the past four months.
Absa Bank also reports a turnaround in prices and calculates that the market will turn positive on an annual basis before the end of the year – which is a bit earlier than previously predicted.
Standard Bank also points to lower interest rates and lower inflation stimulating house prices but warns of the risks of uncertain job security and lack of income growth. Another major factor which could upset the applecart is Eskom’s shock announcement that it needs three annual price hikes of 45%. If approved, the effect on household disposable incomes will be catastrophic – particularly the compounded effect.
Despite the gloomy outlook for the economy, consumer confidence, as reflected in the housing market, is rising. Emigration, as a reason for selling, has declined steadily to 6% of total sales. Downscaling due to financial pressure has also fallen. Simultaneously, selling in order to upgrade rose from 7% to 12% of total sales over the second and third quarters.
Positive Territory
- 05 October 2009
Latest statistics from Lightstone’s repeat sales house price inflation index give a further welcome indication that the market has bottomed. There has been a steady upward trend since January, says Lightstone, which shows we have moved into positive house price appreciation for the first time since July 2008.
The Pam Golding Property Group reports increased activity, especially in the Cape Peninsula, where an upturn in sales heralds the end of a particularly hard winter season. Western Cape MD Laurie Wener also reports that some financial institutions are showing more lenience in granting mortgage bonds – “but only in specific areas”.
Interestingly, in spite of the strong rand foreign buyers, mainly from the UK and Europe, but also Africa, are active and setting new price benchmarks. The rand has appreciated 27% against the US$ since February and some 15% against sterling.
Looking outward, the strong rand, currently R11,87 against the pound, creates an opportunity for South Africans to buy overseas property, with greater London apartments being a favourite. The blend of lower UK residential property prices – down 15% in the last 12 months according to Nationwide Building Society - and the strong South African currency is attractive. As Britain moves from Autumn into winter, prices of London flats are expected to remain fairly static.
PGP’s International Division has a number of apartment developments available in London and through its links with LloydsTSB can arrange mortgage bonds up to 70% loan to value.
Football fervour hotting up
- 21 September 2009
With only a little over three months until the bells toll for the beginning of 2010, Soccer World Cup fever is beginning to build up in South Africa. Some 500 000 football fans are expected to arrive in the Republic at the beginning of June for the event, plus many thousands of players, officials, guests, hangers-on and, of course,
the media.
The month-long feast of “footie” is expected to provide a R55 billion injection into the SA economy, hopefully speeding the country out of the current recession. Adspend alone, according to Nielsen, should increase 12%-20%.
The main concern is no longer whether the new stadiums and the infrastructural developments such as airports, roads and transport, will be ready in time. It is, according to Fifa”s secretary-general Jerome Valcke, whether there will be sufficient accommodation for everyone. Fifa has calculated a shortage of beds in most areas and for the first time has sanctioned the use of guest houses, b&bs and individual homes to let. To this end, Pam Golding Properties’ letting division has set up a section to assist homeowners let their properties under strict vetting and supervision before, during and after the event.
What happens when the jamboree is over is vital as far as SA is concerned. It should boost tourism on an ongoing basis, but somehow the new stadiums, on which billions of rands have been spent, must be put to good use. To this end the government is to set up a bidding fund to enable sports organisations bid for further international events once the Soccer World Cup is over.
Turning the Corner
- 11 September 2009
Statistical information is now coming through, following the SA Reserve Bank’s quarterly economic bulletin, that household credit quality is improving and that the banks are relaxing their credit criteria. This is good news for residential property, as both these issues have been delaying the expected upturn in the housing market. Comments First National Bank’s property analyst John Loos: “We may be turning the corner,” adding,“FNB’s home loan arrears have started to decline.”
Another welcome indicator is that insolvencies have fallen 41% year-on-year – a sure sign that the cumulative interest rate cuts since December last are beginning to take effect. In fact, the improved outlook is almost totally the result of lower interest rates and this is gradually improving the household debt-service ratio. Overall, however, further improvement will depend on interest rates remaining low. If inflation can be brought down to within the Reserve bank’s target range of 3%-6% we stand a chance of further interest rate cuts, since the Bank’s latest modus operandi is to try to stimulate SA’s flagging economy.
Not all the financial institutions are so sanguine. Standard Bank’s Johan Botha agrees that interest rate cuts are working their way through the economy but believes that the housing market will only stabilise towards the end of the year (which isn’t too far off).
Absa’s Jacques du Toit reports that the rate of the bank’s mortgage advances is still slow due to lack of demand. “Growth in advances is expected to slow further,” he adds.
With severe pressure on incomes, households have cut back on borrowing, but the signs of a turnaround are still positive.
To Cut or Not to Cut
- 17 August 2009
The mood among economists is now swinging towards the view that the South African Reserve Bank will not cut interest rates further at its monetary policy committee meeting next month.
Latest inflation figures remain, at 6,7%, above the Bank’s upper target. After inflation descended from its 8,6% peak in February the general mood was that the Bank had room to cut another half percent off the repo rate.
However, electricity and other service costs have pushed the inflation rate up again. Good news is that food prices continue to fall, but tariffs for water and other municipal rates have risen sharply and electricity prices have shocked consumers. Half of the 12 components of the Consumer Price Index (CPI) rose steeply as did prices for more than 75% of the basket of goods and services rose by more than 6%.
The Bank faces a dilemma: cut interest rates further in an effort to boost the ailing economy, or tackle inflation and leave economic stimulus to the fiscal authorities.
As far as the residential property market is concerned, both are needed to kick-start the market. Household disposable income is falling and while consumer indebtedness has been alleviated by five full percentage rate cuts since December last, widespread job losses are impacting severely.
In general, the shrinking economy is more worrying and most analysts expect that inflation will eventually fall within the Bank’s inflation target band of 3%-6% towards the end of the year, then giving the monetary mandarins the opportunity to further cut rates.
Mixed blessing: Interest rates are now at their lowest since June 2006
- 17 August 2009
Interest rates are now at their lowest since June 2006, following the South African Reserve Bank’s half a percent cut last week (August 13). This amounts to a whopping 5% drop since December last year.
The net effect on the property market is that mortgage repayments are now 26,3% lower. These lower interest rates are providing some relief to hard-pressed consumers. They are also improving the affordability of housing, but only now are there glimmers of this relief bringing buyers back .
- Households are still heavily indebted and disposable income is not rising. For example, outstanding mortgage debt is hovering around 50% of disposable income.
- Mortgage advances are few and far between. Bank lending is tight and large deposits are required before loans are made available.
- While the Prime Rate is now down to 10,5%, borrowers are having to pay rates well above this.
In addition, conflicting data from the financial sector doesn’t help build much needed confidence. Some indices show that house prices continue to fall and are predicted to continue dropping until the end of the year at least. Absa, for example, says prices will continue to fall until the early stages of 2010. Others indicate that the downturn may have levelled off and that prices may have bottomed.
On a happier note, there are also indications that repossessions and sales in execution are falling. Matters may well be improving.
Click here to visit the Pam Golding Properties website.
What Advantage? - 3 August 2009
Current analyses of the residential property market suggest that affordability of housing has improved. On the surface this would appear to be accurate, given the 450 basis points cumulative cuts in interest rates since late 2008 and the fact that house prices have fallen considerably.
But are the rate cuts really helping? Apart from the stricter lending regulations imposed on the banks by the National Credit Act, which has curtailed the granting of mortgage bonds, the banks themselves have tightened up their lending parameters.
Bonds are not only harder to get, they have become much more expensive. In the more profligate days of the late, lamented housing boom, banks competed fiercely to lend and mortgage bond rates of two percent below prime were relatively common. Now, two percentage points above prime appears to be more the order of the day.
Simplified, this means that in these circumstances the lowering of rates has effectively been reduced to but half a percent. So much for affordability other than those fortunate cash buyers!
Also hindering improvement in the residential market is the fact that the country is well and truly in recession, resulting in job losses and declining household incomes, which in turn make the banks even more uneasy about lending.
The latest Absa property market report projects that house prices will fall about 3,5% in nominal terms this year; this equates to around 10% in real terms, depending on inflation. However, the bank predicts a gradual improvement in residential property conditions next year.
Great Expectations
The time properties for sale remain on the market is widening, suggesting that sellers are still expecting unrealistically high prices. According to FNB’s latest survey the period has risen to a record high of 21 weeks and one day.
House sale activity has flattened out, but this is probably a seasonal trend. Generally, the year-on-year change in activity levels has turned positive. Almost one third of sellers are in the market due to financial pressures, in spite of the 4,5% drop in the prime interest rate since December.
The main curb on the property market is still the lending famine. Banks are said to be turning down one out of three mortgage applications. Loan-to-value is high on the appraisal list. One banker told me: “We are still wary of lending, but all the banks are feeling a margin squeeze as well as a funding hurdle.” One major problem is that due to the recession, household disposable income is falling. This curtails banks’ ability to lend.
The banks are also demanding stiff interest rates. The old days of preferred borrowers getting bonds at as much as two percent below the mortgage rate are gone. If you have one of these bonds, hold on to it!
Nevertheless, both Absa and Standard Bank have commented recently that they are beginning to feel more comfortable about lending, so there may be some respite for desperate borrowers in the months ahead.
In the UK, where conditions are even tighter, Nationwide, the country’s biggest building society, is offering existing clients trapped in negative equity 125% mortgages. Negative equity is when house values are less than the mortgage on the property. There are an estimated one million UK homeowners in this predicament.
See Brighter Borrowing /Property Outlook, www.pamgolding.co.za