Property prices going down

[Dave A]

I've been eyeing out all the upbeat talk about property price prospects for this year with a somewhat sceptical eye. Well, the hard evidence is starting to come in.

House prices, excluding the effect of inflation, dropped by 2.5 percent year on year in March, the biggest decline since May 1997.

Absa's latest house price index, released yesterday, shows that the real price of a middle-segment house has dropped by 3 percent from an all-time high of about R651 500 in August last year to about R631 800 in March this year.

The middle segment of the market is defined by Absa as houses 80m2 to 400m2 in size and valued at R2.9 million or less, for which it had approved home loans.

Jacques du Toit, a senior property analyst at Absa, expects negative real growth in house prices of minus 4 percent to minus 4.5 percent for this year alone. This will be the first annual drop in real house prices since 1999, when it was minus 0.3 percent.

Standard Bank reported earlier this week that median house prices had dropped by 8.6 percent year on year last month to the lowest level since December 1996, when it was at minus 10.5 percent. The median is the point separating the top 50 percent of house prices from the lower 50 percent.

Willie van Aardt, Finbond's group chief executive, said it had seen mortgage origination volumes shrinking by as much as 40 percent.
full story from Business Report here

[Graeme]

And then there's rates...

Residential property valuations were made (guessed?) when property values were absurdly high. Now that these values are all coming down are we to see our rateable values also reduced? Don't hold your breath - the mayor's new BMW limo has to be paid for...........

[Dave A]

Here is a summary of pressures on house pricing just at the moment.

With the hawkish statements by Reserve Bank governor Tito Mboweni, the market now expects a repo rate hike of 100 basis points this month, taking the prime interest rate to 16 percent, and a chance of another 50 basis points in August.

Based on the terms of First National Bank (FNB), this would increase monthly repayments on a R250 000 home loan over 20 years to R3 478 at 16 percent from R2 496 in June 2006, when prime was 10.5 percent.

John Loos, FNB's home loans property strategist, said times in the residential property were tough. The list of negative influences included: rising interest rates, rising inflation, a slowing economy, National Credit Act obligations, post-Polokwane jitters, Eskom shortages, the Zimbabwe crisis, xenophobic violence and low income yields.

He said: "The list has become significantly longer than previously anticipated, and especially interest rate hiking has gone further than we had forecast. As a result, a 21 percent decline in the value of new mortgage loans and re-advances is projected in 2008, and a period of national house price deflation is now forecast."

According to Lightstone Risk Management's national house price index, annual property inflation dropped to 7.8 percent in April, half a percentage point lower than in March and significantly lower than last April's rate of 14 percent.

Lightstone found that higher value areas appeared to be performing the worst and might have moved close to zero or even into negative nominal growth. Furthermore, house price inflation appeared to be declining the fastest in the smaller provincial markets.

The index said: "Although nominal house price inflation is still positive, one major difference from last year is the decline in real house price inflation (adjusting for consumer price inflation).
full story from Business Report here

[Marq]

Rates bill effect on property prices

There is an additional factor that I do not see being discussed out there on the subject of issues affecting or going to affect the property market. That factor is the effect of the new rates bill handed down by our socialist government, on the property market.

I do not know how the rest of the country will be affected, but with the suggested exorbitant rates rip off in Durban, there is a potential of a further probable 2-5% drop in property prices to accommodate the proposed increase in rates. If you are stuck with a commercial property label (this is different to actually being commercially zoned) then the decrease will be double. You could view the commercial increase as a business licence type fee and suck this up or pass it onto your customers and fuel inflation further, but I feel buyers will discount the rates into the purchase price - or do both.

From what I can gather an average R1mil type property is currently paying about R6,000 per annum on rates. On the new suggested rate from the eThekwini municipal anarchists, this price would be R9,000 per annum. So a simple view is that a R3,000 pa increase represents a capital amount of about R20k (depending who and where you are financed). Taking into account a normal increase in the current rates value Vs the suggested rates - I would discount the purchase price by approx R20k = 2% - If you would like to run a bed and breakfast or your practise or a consultancy - double that to 4%. What I am saying is that I would have to substitute a payment that would have gone on a mortgage (or alternative value) with a monthly rates bill instead.

On a R5mil property, the percentage numbers are the same but we are talking 100k out of a 5 mil property purchase - no big deal in negotiation, one might argue. But consider - would you buy a property that has a fixed monthly indefinite period fee of R3,750 or if you are a business R7,500? Could one ever consider that you actually own your property? These numbers are in addition to your current expenses.

So the basic numbers of the rates transaction could drive the property prices down by 2% but what value will be placed on that huge monthly overhead once the euphoria of the new house feeling has gone away and the monthly bills resettle themselves against your monthly income?

[Karenwhe]

Property prices go down from now on.

But this is interesting.

The article is called

Internal property company memo shocker

http://www.realestateweb.co.za/realestateweb/view/realestateweb/en/page196?oid=11128&sn=Detail

[Marq]

This is why I have fired Sotheby's in the past.

They did not seem to have a handle on the market then so would not expect them to be any different now. Their valuations were always much lower than the opposition companies so that they could get rid of the stock and show turnover - why should they worry if they know most sellers negotiate their commission anyway.

Their general approach in adverts if I recall says - asking price 2million - offers accepted from 1,5mil. So what is the asking price? Why even bother to put this story in the ad if offers at a huge percentage lower are acceptable?

They will also not bother if they do not have a sole mandate. Strange crowd always doing you a favour by selling your place.

If I was the president of the estate agents in the country - they would have been taken off the roll a long time ago.

[Dave A]

I can't help thinking of what happened in '97. Then, external pressure on interest rates put the squeeze on affordability and resulted in a 30% drop on fairly low volumes. This time we've got the interest rate squeeze again and more besides.

I'm pretty sure of the direction of the market, but how big is the drop is going to be?

[Karenwhe]

The thing that some people do not know (some do, but by far not majority) is that the ad does not matter all that much.

If an estate agents get a written offer, or someone wants to sign a written offer at any price, the estate agent is obligated by law to present such offer (without any fail) to the seller chronologically.

In simple words, if you see an ad for 2.2 and you do your own CMA and you put your OWN offer (not even the estate agency one) they have to present it no matter what the price is, even if it is 1.1 or 900K.

And tomorrow if the get another one, they have to do the same.

[wynn]

I see this differently, maybe it's EL
The buyer can only afford a 40% cheaper house, so the guy that used to get a 1mil ront bond can now only afford 600,000.

But the guy that was buying in the 1.6mil ront bracket is now the buyer of your 1mil property.

the problem comes if you overpaid during the good times and you have to sell (I mean really have to) you may have to price 25% less.

If you can wait for the 1.6 guy to realise he can't buy that high anymore you will realise your 1mil price, but you will have to wait! the good news is that when you go out to buy again prices will be in the same range.

[AnakinSkywalker]

Hi. I am new to this forum but I have a burning question that I have been needing to ask.

If you are willing to hold out for at least 5 years, would it be a wise investment to buy property now? Is it too risky to buy property now?

[Dave A]

Over the long term, property has always performed - and property in SA is still relatively cheap compared to large chunks of Africa, so I don't think prospects of us "following in the footsteps of the rest of Africa" is grave cause for concern, either.

I suspect the key at the moment is whether it is wiser to hold off a few months longer for better deals. But I'm sure there are a few bargains out there already.

Karen is probably the best voice to listen to on this, though.

[Karenwhe]

Right now the market is very much a buyers market.

That said it is always risky - no matter what market and what product - to buy something if you do not understand the market or products.

Therefore, there are plenty of bargains right now in property, but if one does not do the homework about the area and have a clear purpose for the reason one buys, one can buy the wrong deal even though right now we are flooded with good deals and not enough buyers.

A good friend of mine just bought a property with 1.2 million equity in it. In other words, he did not buy for 1.2 million, he bought for a saving of 1.2 million in the price. In other words he can sell for 1,2 million more and make a huge profit when the market turns around or just keep it, refinance it and buy more cash+ property - LOTS of it.

Even I was impressed, and believe me I do see some good deals around that one can't believe they even exist.

I guess that is it in a nutshell.

Now it is the time to buy property.

It is never the time to buy property without a strategy for the purchase and without understanding the local microeconomics.

Hope this helps.

[duncan drennan]

It is never the time to buy property without a strategy for the purchase and without understanding the local microeconomics.

This is a complicated question, but how do you suggest one goes about developing that strategy?

[Karenwhe]

Duncan,

Ouch that is too much to write, I think you should rather go to www.PropertyInvestorNetwork.co.za you will probably find at least a few hundred posts on strategy alone out of some 10,000 posts on everything from affordability to what to buy and where.

I really don't think I can replicate that in one post.

There is just too much to know. Not rocket science, but a mass of data and information.

Once you know that, you start building your own strategy.

But in short you would need:

1. To know the purpose of the purchase (hence exit plan).
2. What entities you use (has to match with the above to max profit)
3. Financials of your own and then of the property with forecasts.

Now that said, there are many, many types of strategies, from investing, to trading, to living in a property and speculating.

Generalizing here but to give am example, you would not speculate in down market that would constitute a bad move (to say in the most mild way). But what I said could be totally wrong if you look at microeconomics of an area.

If you buy the wrong property for the wrong reasons - you bought wrong. And it does not matter in what market or at what price because your exist plan may not be achieved to what you wanted or end up paying taxes that are not necessary (e.g. income tax instead of CGT).

Therefore even the price, no matter how low or high would have match the end purpose of the property and exit plan.

Hope this helps.

[meakin]

Dear Marq, on the third of June you asked "Could one ever consider that you actually own your property? These numbers are in addition to your current expenses." I reply that
you own your property until you surrender the title deeds through a sale or because of a default iro of secured creditors.
It is also a fact though that, ignoring inflation, land prices go up (in a boom) and down (in a slump) whilst building values only go down because of depreciation. What ever happens your building is heading for the scrap heap over a generation or so. The trick is therefore to own land with limited improvements and to otherwise lease properties. But don't tell too many about this until you have bought because they are in short supply. Silly damn thing that it does not pay to make improvements!
But did ratepayers in Durban object to the City valuation? I did a sample audit there and 50% of values were below the selling price at the valuation date. That means, prima facie, that the valuation roll would be set aside. Peter Meakin