South African Property Market

The South African property market strength in 2012 will rely on the economic growth which should pick up before the sector can realise real growth.

According to Samuel Seeff, Seeff Properties chairman, the economy would need to pick up before we can expect to see any real strength returning to the property market.

He explains that the market will experience reasonable demand with a lot of meaningful gains in clearing distressed properties out of the market, albeit with little fortune.

“No further interest rate hikes are expected and this should help consumers reduce their debt levels by 2013,” he says.

He says while consumers will still buy and sell property, they expect to see low sales volumes given the continued financial constraints and high bank decline ratios.

Seeff says 2013 will be the time that we will see a restoration of activity in the South African real estate market to levels pre-2007 when the National Credit Act was introduced.

Throughout 2012, sellers will still be competing with distressed properties and they will need to price conservatively and take heed of real estate agents’ advice of the market as to what buyers are prepared to pay.

Cash buyers will have the upper hand and time to consider their options and are likely to negotiate the best possible price and, on their terms.

“It is my view that the pent up demand that has been in place since 2007 will start impacting on the market, assuming that the banks are able clear impairments and debt out of the market.”

Only once turnover in the market picks up, are we likely to see an uptick in prices, but this will be mild in strength and will remain as such throughout 2013 and 2014, he says.

He says Gauteng is the powerhouse of the market and usually first to feel strength returning to the market and this regional is set to improve this year.

As for coastal properties, especially the non-primary markets including holiday and second homes and leisure properties, he predicts the sustained lack of demand to continue until the primary markets across the country pick up.

Experts believes we can look forward to:

-GDP growth will remain relatively flat with predicted growth of between 2.5 percent and 3 percent for 2012

-Does not expect further interest rate drop, depending on inflation, he anticipates an interest rate hike

-house prices have already come down by between 15 and 20 percent from pre -2008 highs, no significant price drops expected. Prices and sales volumes are likely to ebb along throughout 2012

-for those property owners who are not in a hurry to sell, hold on to your property but if you have to sell, price conservatively as low demand will keep prices subdued

-residential rental yields are set to increase as those who cannot afford to buy will rent instead. Rental rates are likely to increase by between 8 percent and 10 percent.

-commercial rental yields are expected to increase by 8 percent on average as per standard annual escalations and demand will remain relatively subdued.

Meanwhile, Dr Andrew Golding, chief executive officer of the Pam Golding Property (PGP) group expects the leisure property to take longer to return to its glory days and recovery compared to the residential property sector.

PGP hopes to see an improvement in foreign investment and expects that foreigners who have traditionally found South African an attractive place to invest in property will continue to do so in increasing numbers.

“We hope to see numbers of transactions continuing to increase, hopefully with approximately a 10 percent increase over this year and prices will remain flat in real terms.”

Golding explains that this year estate agents across the country will have re-organised themselves into two separate organisations.

One will represent a labour component or employee component (the former Institute of Estate Agents) and the other represent business owners and principals (the so-called business component) REBOSA.

These two organisations will be able to represent in a fully inclusive way, the constituencies that they are designed to represent.

In this way the industry will be able to be in control of its own destiny and to speak with one unified voice and will be able to interact meaningfully and credibly with all the stakeholders, both government and non-governmental, he says.

From a regulatory perspective, PGP hopes this year doesn’t have as many regulatory implications and that the full effect of the Consumer Protection Act will have been bedded down and properly understood, he adds.  – Denise Mhlanga

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The decision by the South African Reserve Bank (SARB) to cut interest rates by 0,5% shows that the housing market has returned to a weakening trend and this would seem to set the scene for a relatively good buying period.

So says John Loos, property economist at FNB, who adds that despite the repo rate dropping to 6% and the prime rate falling to single digits from 10% to 9,5% for the first time in three decades, home owners should still not be lulled into a false sense of security.

“Potential buyers should be aware that this does not mean that there are no housing-related cost increases. Municipal rates and utilities tariffs are set to be a key source of housing-related cost increase in the next few years, as utilities look to find the funding for much-needed infrastructure. Eskom is presently the biggest driver of home-related cost increases.

“In addition, applicable especially to Gauteng, looming large is a major increase in transport costs for many people, as many of the province’s freeways are set to become toll roads.

“What the SARB is currently giving, other authorities are taking back.”

He says one would therefore be well-advised to buy a home well within one’s means, making provision for the big housing-related cost increases, and rising transport costs mean special consideration for location relative to one’s commuting destination.

Jacques du Toit, property strategist at Absa, said based on the latest cut in interest rates, mortgage repayments will now be about 31% lower compared with late 2008, when the mortgage rate was at a level of 15,5%.

“The cumulative 600 basis points worth of interest rate cuts since December 2008 have caused the cost of servicing household debt, including mortgage debt, to drop significantly. However, many households are still struggling with a high debt burden, with the ratio of household debt to disposable income above the level of 78%. The forecast is for the debt ratio to remain around this level towards the end of the year and into 2011.”

According to Absa’s calculations, house price growth slowed down to a nominal 7,1% y/y in August 2010 on the back of the base effect of a strong recovery in price growth in the second half of last year. “House price growth is expected to taper off further towards the end of the year, and to remain in single digits in 2011. The lower interest rates, however, will support the property market, but are not seen as a major stimulating factor.

“After bottoming in late 2009, year-on-year (y/y) growth in household mortgage advances remained relatively low in the first seven months of this year, reflecting conditions with regard to household finances, the extent of consumer confidence, and the effect of the National Credit Act (NCA). Household mortgage advances will be supported by the low interest rates, but are forecast to continue to record single-digit y/y growth in the rest of 2010.”

Loos said the short-term positive impact of the latest cut will be too small to change the weakening trend in the property market. “This is because the negative factors slowing the market at present appear significantly more powerful. These are twofold, i.e. a slowing economy as well as the wearing off of the huge interest rate stimulus emanating from 5 percentage points worth of rate cuts in the period December 2008 to August 2009.

“The wearing off of such a major stimulus can hardly be offset by today’s small interest rate reduction. Therefore, we expect the ‘mini-cycle’ slowdown in the residential market to continue, with y/y house price inflation (at 7,2% in August) to continue to decline steadily towards year-end.”

Dr Andrew Golding, CE of the Pam Golding Property group, says this is good news for existing home owners and for prospective home buyers. “Although the residential property market has shown some increased activity in terms of sales volumes (ie units sold), the ongoing constrained economic conditions and limited access to bond finance, coupled with the significantly increased electricity and rates tariffs, is still hampering significant recovery in the housing sector.

“With the arrival of spring, there is usually a natural seasonal increase in activity in the property market and there is every expectation that this season will be no different, particularly given the fact that the market experienced an ‘unnatural’ slowdown during the six weeks of the Soccer World Cup and appears to be catching up.”

Golding says some signs of green shoots of recovery are there, albeit to at least the market activity levels that were present in the run-up to the World Cup. “These activity levels are in themselves 30% up on last year (2009). A number of factors are responsible for this recovery and include improving market sentiment, i.e. a sense that the market might have reached the bottom; improving bank lending; greater realism amongst sellers regarding the current market value of their properties; and an increase in the number of buyers looking to transact.

“Show house attendances are generally on the increase – in line with expected trends for this time of the year. We have also seen the slow but steady re-emergence of buy-to-let investors in all the major metropolitan areas of the country. International enquiries, while generally slower than in previous years, have also begun to increase. In respect of the development market, there are growing indicators that the larger developers are poised to begin re-entering the market.

“As far as house values are concerned, our view is that for the remainder of this calendar year, prices will remain relatively steady with house price growth expected to be somewhere between 0% and 5%.

“From the perspective of price sectors most in demand, there is very little change to the status quo which has been evident for some time, namely with the market from R800k to R1,5m being the most active. However, with properly qualified buyers and realistic sellers, properties are moving in all price segments from the affordable housing segment right through to the ‘über prime’ market.”

Samuel Seeff, Chairman of Seeff Property Services, says although the rate cut was much-needed and expected, a bolder approach would have been welcome. “We would have liked to have seen a cut of 0,75% or even 1% as a boost to the economy.

“However, this issue is not as significant to the market as the banks’ approach to lending. If we are going to have any sort of kick-start to the property market, it will come about as a result of banks reducing their criteria in terms of approving loans.

“The interest rate is not the factor that is holding the market back right now – it is the banks. We are not even talking about 100% loans-to-value bonds being rejected – there are people prepared to put in equity, and the banks are still not approving them. If they could start to relax on their criteria this would begin getting the market going, and would be of benefit to all.

“I am not asking for banks to give 100% loans. I think their focus on ensuring that the buyer/investor puts some money into the transaction is a good one. However, we have seen cases where the buyer is asking for no more than 50% and is putting in as much as R1m or R1,5m and looking for another R1-1,5m, and this is still not approved.

“It is this type of thinking that holds the market back. There is sufficient buyer interest, enough attendance at showhouses and plenty of buyer viewing, but the offers to purchase which are not being approved are holding back the market at the moment.”

Jan Davel, the new MD of the RealNet group, says the minimum monthly repayment on a 20-year home loan of R500k will now decrease by R164.

“This will obviously be of some help to existing homeowners, but the real benefit of the Reserve Bank’s decision this week is that it will make it easier for potential homebuyers to qualify for loans. For example, the monthly earnings required to qualify for a R500k loan at 9,5% will be some R15,500, compared to the R16,100 required at the previous prime rate of 10%.”

And prospective buyers, he says, will be further assisted by the fact that the rate cuts will shrink their existing monthly expenditure, which in terms of the NCA must also be assessed before a loan can be granted. “Repayments on cars, furniture, clothes and credit cards will all decrease.

“What is more, with a good credit record and a deposit, some borrowers will even be able to secure loans at below prime rate, making it even more affordable for them to buy property.”

However, he does not expect the rate cuts to prompt a spate of new borrowing or an immediate spike in residential sales, but rather to help the property market maintain its current momentum towards full recovery.

“For one thing, there is quite a shortage of affordable, entry-level stock at this stage, because developers are bringing very few new small homes to the market and the average price of existing small homes has climbed steeply in the past year.

“And on the other hand, the middle-market upgrading that might have been boosted by the rate cuts will be quite constrained, we believe, by the effect on household budgets of higher municipal rates and service charges. Most existing homeowners will probably rather take this as an opportunity to reduce debt – but that will benefit the property market in the longer-term.” – Eugene Brink

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