The year is ending for property investors, sellers and service providers better than it started. After a gloomy period of sliding house prices amid slow sales volumes, residential real estate has started perking up and South Africa looks quite good in the global charts. It ranks number 15 among 18 countries registering positive returns year-on-year, according to the latest Knight Frank Global House Price Index.

Absa’s residential real estate expert Jacques du Toit issued a report, also this week, that South African house prices improved not far off 5%, comparing November 2009 to same time last year. The average South African house now costs R1m.

A marked improvement in performance late this year means that when the average South African looks back at 2009, their home will have declined in value by roughly ½%, according to Absa’s calculations. That’s a relatively modest fall if you consider we have been in the throes of the worst global recession seen in decades.

In broadbrushstrokes the picture is looking rosier than it has for some time. Said Du Toit: “If recent trends in price levels prove to be sustainable, nominal price growth of at least 5% can be expected in 2010. Real house prices are forecast to decline for a second consecutive year in 2009, with at best a small real increase next year, based on nominal house price and consumer price inflation trends and projections.”

Can the good times continue?

Rising electricity rates are causing great concern. Some reckon the steep 35%-plus increase Eskom would like to implement will put the brakes on the economy just as South Africa is trying to pull away from recession.

FNB’s top property analyst John Loos noted that it isn’t only under-investment in electricity supply that has caught up with the nation.” Transport, water and sewage in some areas also require urgent attention, which would probably imply more costs coming the way of the household sector,” he observed.

There’s also danger riding in from the Middle East.  Until now, Dubai has been synonymous with “shop till you drop during your airport stop-over” for many South Africans. Its crashing real estate market, however, is threatening to cause massive financial ripples across the globe and at the very least discomfort in some quarters. Dubai’s government, through various entities, has tentacles in many countries and vice versa.

Even South African life assurer Old Mutual has skin on the game in Dubai. Bloomberg news service reported earlier this week that Old Mutual’s U.S. life unit has $83.6m in Dubai World-related bonds. It quoted ratings agency Moody’s as saying it does not believe the exposure is “meaningful”, however it highlighted the fact Old Mutual is one of the three “American” insurers with the most bonds sold by Dubai World, the holding company that’s in talks to renegotiate a staggering $26bn of debt.

Liam Bailey, head of residential research at Knight Frank suggests the whole Dubai World debacle is threatening the global pick-up in residential property prices. Bailey said, after the release of the latest Knight Frank Global House Price Index: “The recent debt issues with Dubai World and the subsequent loss of confidence by investors means even this nascent rally is already under threat.”

House prices are now rising in a clear majority of locations around the world with almost 70% of countries in the Knight Frank Global House Price Index reporting growth in the third quarter of 2009. There is even talk of another property bubble developing in some locations, like Singapore. Improvements come in many cases after large price declines.

“It is worth noting that house prices in almost 60% of the countries in the index are still lower than they were a year ago. That is not to say prices are on a guaranteed one-way trajectory – the global recovery from recession is unlikely to be trouble-free as the recent problems in Dubai have highlighted – but it does seem that any further falls are likely to be corrections rather than the start of another round of drastic reductions,” said Bailey.

In the main, it looks like it is a little early to get out the party hats and start celebrating. If you have been planning on selling, now might be a very good time to put your home on the market. At the very least the 2010 euphoria should help add some fuel to the market. If you’re buying, or holding, don’t hold your breath for rip-roaring returns any time soon.

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When one takes a bird’s eye view of the affordable property market, a supply and demand mismatch is evident with levels of consumer interest hampered above the R3000 per month mark.

Overall the demand for housing in the affordable property sector is huge, but access to finance and associated costs are driving consumers to rent rather than buy.

There are clear bands of affordability in terms of monthly rental or bond repayment levels.  There are no current vacancies for the small and cheaper units, but the larger units priced on average from R2800 to R3200, depending on their size and whether furnished or not, are not getting rented as fast as the cheaper smaller units. These units are also renting well but the cheaper units are flying off the shelf like hot cakes.

There is huge interest from potential buyers in inner city Johannesburg.

Unit prices average R350 000 in downtown areas, but accessing end user finance is still a challenge for this market. Affordability becomes a problem for units priced above R450 000 and our research shows unit sales above R500 000 are very slow.

I H S partners with developers in the provision of developers by injecting equity capital in return for a shareholding. It is already a partner in numerous projects, having invested about R500-million of its much larger South African Workforce Housing Fund.  This investment has financed the creation of 17 000 units of new or renovated units.  IHS expects to have doubled its investment levels to around R1-billion by next year.

Among its current projects are a partnership with AFHCO to convert the old Greatermans building in downtown Johannesburg into over 400 rental units. Another project is with the Brian Falconer Property Group to develop 2 400 new homes near Carnival City, a third with Calgro M3 Holdings to develop some 6 400 homes in Fleurhof south of Johannesburg and a forth with the Aengus Group to refurbish 1 700 homes in the inner city Johannesburg area.  And there are a number of additional projects in the pipeline including a large public private sector partnership in Soweto.

Defaults in rental payments are relatively low across the board and rental housing demand and rental inflation have not been negatively impacted despite the worldwide recession. But, unemployment and the fear of unemployment was dampening the enthusiasm of both prospective buyers and mortgage financers. 

We remain very positive about South Africa. The 2010 FIFA World Cup exuberance and the worldwide recovery – which will hopefully be more apparent in the new year – is fuelling the bounce back in the overall property market.

But, in the affordable sector, there is an important balancing act that needs to be managed. On the one hand we have a massive opportunity in terms of the demand for homes and on the other we have the threat of banks’ funding drying up for both end-user  and development finance. 

And although interest rates are at historic lows, only limited stock in the affordable price band is currently being constructed.

Pent-up demand coupled with current low interest rate levels have made existing unit stocks more affordable and attractive, but the lack of new stock is driving up the price.

The constraining factor all round remains that of end-user finance.

Mortgage providers have made their credit criteria more exacting and have, until very recently, required large deposits from households that conventionally have little or no savings. In recent weeks the mortgage supply appears to have loosened up a bit, but it is still constrained.

The time has come for government to encourage financial institutions to introduce fixed rate mortgages for families that qualify at current low interest rates.

These borrowers might not be able to sustain a 3% or larger increase when interest rates start climbing again and this is preventing them from taking the plunge now while rates are relatively low.

Fixed rates or a cap on how high interest rates can go are critical for households with less disposable income. These households are most negatively impacted on when interest rates increase and this inevitably leads to foreclosure and bank lending being withdrawn and in return impacts on the ability of developers to produce stock.

This will make affordable housing remain in a boom-bust cycle instead of a more robust sustainable pattern.

To apply for your Affordable Mortgage Loan please go to www.mortgagepluscc.co.za or call us on (011)327-4489