Housing Bubble in South Africa thoughts and ideas

[cyppok]

Yes, I decided to venture into this wonderful tirade of negativity. "Everything will collapse and bla bla bla"
Here we go...


Decided to use this chart from a diff site hopefully it works.

I'll start a little closer to home. In the wonderful and bubblicious 2007 people were bidding up prices here in the New York City area like crazy. From 2001 to 2007 (I am not posting statistics but simply based on my own internals since I did periodically look at residential/commercial prices) anyways prices went up between 2 to 3+ times (200-300%). Was it justified? not really. Population growth actually stayed the same more or less ergo NYC held about 8 million back then and does so now as well. Slowly but surely through the reality of 2008, 2009, and through 2012 the prices went slowly but surely down for the most part. However, there are still 'cheap' apartments that were being sold for 350k-395k back then and same price today (120 m /1200sft) that have in essence sat on the market for the past 4 years or so. Most of them are unaffordable for the median household which makes about 50-60 grand a year. Slowly but surely those things that do sell are lowering prices. Miami got cut in half and still is somewhat falling. Arizona and Phoenix area similar. Texas never really went into unreal territory to be honest. California probably fell by a third. [I am talking about commercial and residential although commercial has been holding due to banks trying to push forward the inevitable]

Now lets take South Africa.

So we are after the denial and are in back to normal phase before the collapse ...

http://www.economist.com/blogs/freeexchange/2010/10/global_house_prices

(try this widget you could go to 2q 2012 BTW click on house index and try 'prices in real terms' to get an idea of where I am leaning at)

Everyone thinks "we are different", "incomes are growing", etc... In 2006 at almost the height of the property bubble
http://therealdeal.com/issues_articl...ys-from-dubai/ they bought the "Essex House" this is one of the best locations in NYC stares right onto central park, close to plaza hotel all the super expensive 5th ave shops and whatnot. They bought for 440mil+50/90mil restoration sold in 2012 for 362+18 mil renovation planned. Lets be generous 440 to 360= -18% is a decent drop and this is the ultra center of the city.

Real wages in SA are far lower then here and the income disparity/fluctuations are higher. So the market is skewed in to those actors that have higher wages and are more mobile. The reality is real incomes are falling compared to the world, even as global real incomes are falling as well. Granted I figure your property taxes and other aspects of burdens are lower than here, in the end it is all about demand and supply. The other aspect is that inflation wise you have a much higher debasement of currency so property seems more attractive the problem is that in the end it is determined by wages and how affordable it is to the pool of available buyers. Every major country has foreign buyers they come and go but internals are in the end what push the markets to sustainable highs or lows.

My feeling is you are on par with Brazil which is also on the cusp of its' heights and seems stable at the new "normal"...
Generally once you get above 3 times median income for house prices it becomes straineous. After 5 its not really sustainable and if you hit double digits its insane.

[Just Gone]

You seem quite "fixated" with SA. ......

You should visit sometime and see what a fantastic country we live in.

[cyppok]

You seem quite "fixated" with SA. ......

You should visit sometime and see what a fantastic country we live in.

I'm un-employed (tickets are around $2k more or less)
I'm sorta poor, although I live with parents.
I can't communicate that well to get a job either online or off, hence my resumes are landing in garbage heap.

One of my friends/acquaintances went there recently, the amount of immune shots and whatnot prior does not seem appealing. He came back and was sick for four months (without exaggeration literally 3-4 months).

I mentioned this before hand that I get into these obsession fits periodically and then it ends and I move on.

Its' not very safe it seems, even compared to Russia or Ukraine.
Lets just say my view is that it is somewhat safer then Chechnya until the sun goes down and then its equal.
The climate might be nice but I am used to it grew up in subtropical climate, only one city in Russia has it btw you could guess without searching. Girls wise SA girls look good but my guess is if I went to Ukraine to visit my uncle the girls there would be far better.

I am very very bored Kevin. I started two sites and gave up on both of them without even proper launching of the second. Never figured out how to make money with first (didn't try ads or anything and didn't pay for host so the domain was forwarded etc...)

[Dave A]

Damn economist widget wouldn't run for me
I'll try again at the office tomorrow.

Interesting graph though. What would make it even more interesting was if the volume (number of properties changing hands) were mapped in there as well - now that would tell a story!

cyppok, what has made South Africa's property market a little different to (at least) the western world is quite a few things, the most significant probably being the introduction of the National Credit Act in 2006. This had already started squeezing credit extension well before the GFM hit and as a result we didn't have that "last 18 months manic overrun before the bubble bursts". I'd suggest compare our graph to Ireland to see what I mean (with the app not working for me on this machine I'm guessing, but I strongly suspect it's a solid guess).

Using your "profile of the bubble" graph, what happened is the "smart money" folk were suddenly obliged to start making decisions for the "public". Quite wisely they took a cautious view and were already cooling the market well before the GFM hit. Compare this to Ireland, Spain, USA etc. where finance was being thrown at the market in that period, accelerating the already overconfident punters.

Also, due to "affordability" being front and centre as the priority criterium for finance rather than the perceived value of the secured asset, we simply did not have a big spike in defaults when the crunch came. So no flood of property onto the market and the resultant massive oversupply that helps accelerate the collapsing bubble.

[cyppok]

Damn economist widget wouldn't run for me
I'll try again at the office tomorrow.

Interesting graph though. What would make it even more interesting was if the volume (number of properties changing hands) were mapped in there as well - now that would tell a story!

cyppok, what has made South Africa's property market a little different to (at least) the western world is quite a few things, the most significant probably being the introduction of the National Credit Act in 2006. This had already started squeezing credit extension well before the GFM hit and as a result we didn't have that "last 18 months manic overrun before the bubble bursts". I'd suggest compare our graph to Ireland to see what I mean (with the app not working for me on this machine I'm guessing, but I strongly suspect it's a solid guess).

Using your "profile of the bubble" graph, what happened is the "smart money" folk were suddenly obliged to start making decisions for the "public". Quite wisely they took a cautious view and were already cooling the market well before the GFM hit. Compare this to Ireland, Spain, USA etc. where finance was being thrown at the market in that period, accelerating the already overconfident punters.

Also, due to "affordability" being front and centre as the priority criterium for finance rather than the perceived value of the secured asset, we simply did not have a big spike in defaults when the crunch came. So no flood of property onto the market and the resultant massive oversupply that helps accelerate the collapsing bubble.

5% is the repo rate on most finance sites I visit ( I assume that's the default rate)

http://www.absa.co.za/Absacoza/Economic-Research/Property-Research

Housing review 3Q 2012 notice on page 6 the rates have been flat for mortgages and historically at the bottom, last vestiges of proping of the asset price via debt affordability.

The reality is very simple if the median house is more then 3 times than the median income it should come in line either one has to fall or both have to adjust to where that is the reality. In SA that is not even close (even here in states its 5+) in Europe it was higher and in China over 20 but in SA I am going to guess its about 10 times if median is 50k rand and median house is 500k rand.

Not sure how credit act of 2006 affected you to be honest, doubt it changes the dynamics of economic wages being or not being there and people affording or not affording to pay for the house.

The other side of property bubbles here in the states is banks trying to curtail anything falling onto the market so you get auctions with reserve prices where nobody bids because its not a deal to pay what the bank wants. Ergo the property lays there on the market, people still live in it and the bank has no reason to foreclose to sell it because other properties put out haven't sold at prices it wouldn't have to eat losses at. I am sure same thing happens there in SA, shadow inventory sort of speak if you want to search for it. Now to me in the states your prices seem somewhat reasonable, until I consider safety, property rights, and the notion that I will be in a minority with leaders unconcerned about economics at all. The other point being is you are more expensive than Bulgaria and good climate near the black sea near which where I sort of lived when I was a kid.

There is volume data I am sure just can't find it probably your national realtors have it but it will probably be somewhat doctored to give the impression of stability. Just like here where sheriff sales arent counted and other aspects only straight sales.

[Dave A]

5% is the repo rate on most finance sites I visit ( I assume that's the default rate)

Nope. The South African repo rate is the local equivalent to the Fed Funds Rate in the United States. It's the rate that local banks can access funds from the SA Reserve Bank.

Perhaps an unfortunate name

The "3 times median income" line is an interesting one. Local banks will only finance property where instalments will make up 30% or less of income. This has probably gone a long way to inhibiting us from crossing that line.

When it comes to comparing median property value to median income, I suggest you should only include property owners in that median income calculation. It would probably produce a more reliable indicator. I suspect R50k might be closer to the per capita median, and certainly a long way off the property owner median.

[cyppok]

Nope. The South African repo rate is the local equivalent to the Fed Funds Rate in the United States. It's the rate that local banks can access funds from the SA Reserve Bank.

Perhaps an unfortunate name

The "3 times median income" line is an interesting one. Local banks will only finance property where instalments will make up 30% or less of income. This has probably gone a long way to inhibiting us from crossing that line.

When it comes to comparing median property value to median income, I suggest you should only include property owners in that median income calculation. It would probably produce a more reliable indicator. I suspect R50k might be closer to the per capita median, and certainly a long way off the property owner median.

http://za.news.yahoo.com/home-loan-defaults-blamed-absas-profit-slump-110400926.html

In a 2011 annual report, released on June 1, the department found that retail mortgage defaults, the largest component of total retail defaults, peaked at R77-billion in April 2010 and subsequently declined to R60-billion in December last year, a fall from 8.6% of total loans to 6.9%. Banking supervision data indicated that home loans and commercial mortgages comprised 42.5% of all gross loans and advances in 2011 – by far the biggest portion.

(do you believe this... I do not I thinkt hey just started hiding and pushing those defaults better. Imagine a family who defaults and the bank tells them to just keep paying what they can and they can stay in the house. The family is fine with it and the bank has less supply on market pushing prices down on their already existing inventory on the market. In essence they are hoping time will fix their inventory problem and real prices get pushed up by inflation to make their loss nominal, they rather eat the opportunity cost on recovered value today then suffer a real loss which they already suffered mind you. You also have to take into account that until a willing buyer comes and buys that property at lower price if the bank agrees to it they are not really posting a loss even though it is embedded in there it is not shown to the market.)

Major banks and their non-performers, granted the discharge rate is usually smaller. (yes we have repo rate here too didn't think of it was in a hurry they borrow at 5 and lend at 8.5 or more I get it)

No, its not just property owners its everyone, especially first time buyers and renters as well. Marginal demand impacts marginal supply. Prices get impacted by marginal demand and what those people can afford. Ergo you may have 50 properties and someone may have 0 properties but both of your actions in the market matter and the last person buying/renting a property on the market impacts the last price set.

So how much property do you have . Property baron of durbania or what.
Rent wise I am sure prices are very out of wack if you consider yield granted I think the property tax system is not as harsh there although don't know.

Would be nice to have nice coastal estate (with not too much wind) and a private beach close to a river. With 3-400 hectares growing grapes for raisins or better yet almonds and a few walnuts on the outskirts (walnuts are natural insecticide btw or at least seem to be) And all of it to work with me sleeping.

[Dave A]

So how much property do you have . Property baron of durbania or what.

Or not, unfortunately. I service the property market so I keep a very close ear to the ground.

Chew on this -



I picked '94 as the starting point for the one above because that was the start of our new democracy. If you go back to '76, the picture is even more telling:



It's not like we weren't affected by the GFM - we just hadn't overrun the market.

Damn nice tool, BTW (now that I'm on a machine where it works).

[Just Gone]

Cyppok - I started reading your first post, then like you got very very bored with the second and stopped reading because a lot of it was a load of crap, but decided to comment on some of your first post.

I can't communicate that well to get a job either online or off, hence my resumes are landing in garbage heap.

One of my friends/acquaintances went there recently, the amount of immune shots and whatnot prior does not seem appealing. He came back and was sick for four months (without exaggeration literally 3-4 months).


Its' not very safe it seems, even compared to Russia or Ukraine.
Lets just say my view is that it is somewhat safer then Chechnya until the sun goes down and then its equal.

Yes I see and understand your "communicating" problem.

Many countries you travel to you need "shots"

With regard to your "not very safe it seems" ............... we have crime, like your country, but believe me you can go out when the sun goes down, so you seem to really have an exagerated perception of our country.

Believe me I would rather live in my house with a garden, trees a beautifull view, than on the 20th floor of a grotty dirty building in the middle of New York with other buildings as my view with a little pretend garden on the top. As much as our country has crime I would not exchange it for any other country in the world, and yes I have travelled to quite a few so I can state my opinion. Every country has its own problems, but the problem with our country a lot of people have misguided uninformed opinions of SA. I find a lot of Americans to be very uneducated - I have spoken to them overseas, I have overheard them talking in this country eg The 2010 Soccer World Cup I overhead an American telling his buddies in Nelson Mandela Square Sandton that the sqaure and the complete area was built for the soccer world cup and that there was just bush before that !!!!! which is so far from the truth its frightening. I hate it when people try to act like they know it all without finding out the facts first. I'm surprised that he did not carry on to tell his friends that there were lions roaming around the area as well before they built it

[wynn]

So we are after the denial and are in back to normal phase before the collapse ...

The problem the USA had with the property market as I see it was that the banks were unscrupulously lending money to all and sundry whether they had an income and whether they could afford the repayments or not, this loan was secured by the value of the property.
Then when the loan defaulted they simply renegotiated with the owner, gave him a bigger 100% loan and kept the outstanding amount owed and gave the owner the difference.
These loans were illegally bundled with a few real value property mortgages by the banks and again unscrupulously sold to unsuspecting investors as 'sub prime'.
When the bubble burst, there was actually no equity in the over priced over extended property market therefore the sub-prime crisis, the investors took the hit.

We on the other hand were never allowed to borrow more than the installment value we could repay, the bank always valued the property lower than the market, so if you defaulted your loan the bank sold the property for any figure greater than they were owed, because auction prices are lower than market price there are plenty of takers. The owner on the other hand lost any equity he had on the value he purchased the property for when it went to auction, usually his 10% or more deposit plus any capital gain in the value of the property so he took the hit.

The 'credit act' actually tightened up the ability for us to purchase property before the sub-prime crises hit the rest of the world.

The other advantage we have is that there is still a huge demand for property in RSA, smaller lower priced houses, sure, but a market never the less.

[Dave A]

Kevin, to me it's clear cyppok ain't no fool.
And there's value in getting an outsider's view and to challenge one's thinking.

At the end of the day, it's also a chance to fix misconceptions - both the overseas view of us and our own view of ourselves.

You and I know that you don't need shots to visit most of South Africa, but some of our nothern border wilderness areas and certainly once you head north of the border (still in Southern Africa, remember) you most certainly do. And even then you could still get whacked with sleeping sickness, malaria, bilharzia, tick bite fever (and there's probably more) that could have you stuffed for four months (or longer).

Or maybe cyppok's buddy was just shagged from having such a good time

We also know our crime rate isn't good, but it's not the worst either, and again, it depends where you go.

So let's not be defensive, my friend.

[cyppok]

Bah comp rebooted and I don't feel like writing it all over again.

Kevin those are my perceptions and I am sticking by them after watching documentaries on youtube. They may be wrong but they are mine.
Education and indoctrination are great they teach you to behave like sheep and nod when the government tells you red is green and vice versa. I like thinking for myself, I may be wrong but I have nobody to blame but myself.

Dave... yes Ireland is cheaper than SA at the moment cause it is slowly going down to affordability while SA is still up there and in real terms higher.

Wynn its not just loans and people its also builders and construction companies, real estate creep due to higher values and other aspects. In Ukraine there is a bubble and prices are deflating and all you could have taken out was 1/3rd the value bank thought you prop was worth which was always below. (lots of reason for this but I won't go into it)
Those large inventories and the ability to keep builders in solvency makes banks/them partners to keep inventory off of market. This prevents market clearance and doesn't eliminate the current burdens of taxes, upkeep, security, weather, etc on the amount of properties they keep in said shadow inventory.
If the average prices is 1.2 mil rand and average wage is 50k say household makes 100-150k rand its way way above their 1/2 possible payout for a mortgage or anything. They might get cheaper properties that are below but overall the market shifts upward in the amount it likes to charge per meter or sf and size of lot or building materials expended. Ergo everyone wants THEIR margins to stay intact with prices being managed by all participants until it starts clearing at which point everyone eats it...

my comp crashed and lots of erased stuff so reposted i guess.

"Its' different here" "We are special" etc doesn't work.. Dubai thought that too.

P.S. they went to Cape Town and then on a safari somewhere my guess they traveled all over. He said food was very cheap and for $10(82.5R or so) bucks you could be served very well. He really liked it but he did get sick for months after.

FYI I was telling my parents that it couldn't go on since 05'-07' market wise was reading lots of bubble blogs who had historical median income to median house price data for the past century + thats where I get my 3times median income thing. Was a very nice graph from 1880s or before doubt I ll find it.

[AndyD]

Kevin, to me it's clear cyppok ain't no fool.

Agreed

Kevin those are my perceptions and I am sticking by them after watching documentaries on youtube. They may be wrong but they are mine.

I spent some time living in NY as well as in SA and I can say I would compare your survival rate as fairly on par as a normal resident. There's many similarities, NY for example you have to take on a block by block basis. One block you're safe as houses in a shopping or theatre area for example, you might walk one block and find yourself in a red light district or surrounded by dingy hotels that charge out rooms by the hour or close to the bus station where people hang on the streets drinking out of brown paper bags. SA is similar, if you're in a normal middle class residential area your easily assafe as you'd by in NY, similarly not too far down the road you might find yourself in an area you might not want to be in.

[cyppok]

Agreed



I spent some time living in NY as well as in SA and I can say I would compare your survival rate as fairly on par as a normal resident. There's many similarities, NY for example you have to take on a block by block basis. One block you're safe as houses in a shopping or theatre area for example, you might walk one block and find yourself in a red light district or surrounded by dingy hotels that charge out rooms by the hour or close to the bus station where people hang on the streets drinking out of brown paper bags. SA is similar, if you're in a normal middle class residential area your easily assafe as you'd by in NY, similarly not too far down the road you might find yourself in an area you might not want to be in.

Yes and no. NY is relatively safe I can even go to a pretty bad neighborhood and walk around a little bit (during daytime before sun goes down). I feel SA is a bit more dangerous though. You are probably right though. Its gotten much safer from the 90s to be honest. Now Detroit or Camden (across from Philadelphia) well those are scary places. Very cheap housing though if you want like 8-9 grand or so in Detroit and probably close to it in Camden maybe a little more expensive (which is odd cause I think its more dangerous).

Also forgot to mention that Ireland had no property taxes up until recently on residential until after it was mandated by bail outs for its investment banks so that euro banks could get "more certainty" in being whole in their bond payments etc... fleecing and whatnot.

___

ON a totally different topic I have an exam tomorrow , I will try to be very optimistic and do my best. Hopefully I get a call back didn't study for it though but who knows I generally did well on exams without studying.
Good luck to me, lol.

[desA]

It has been interesting to follow Mish's blogs over the years. His review of the real estate bubbles has been interesting. He predicted the collapse in Australia & elsewhere, fairly well.

One of his links pegged SA as having the highest bubble globally - well above Hong Kong - leagues above the rest of the planet. I don't remember the precise indices used. Ireland paled in comparison, so I'm not quite sure of the Ireland/SA comparators above, to be honest.

I tend to watch the number of For Sale boards around the patch, versus the Sold signs. Over the past year(ish), the number of For Sale signs has been growing rapidly in many areas I've visited. Indications of the beginning of a real estate bubble collapse?

Practically, the SA economy is heading for a major re-balancing act over the next while. The economy was artificially buoyed by the World Cup of 2010. Once that euphoria wound down, the place has been steadily running towards some level of climax. My personal view is that SA is on the edge of a real estate meltdown, which will hit home as the economy continues its downward slide. SA has little, or no technical expertise left, after years of brain-drain - little to re-attract returning expats.

The reality is that SA is fast approaching Banana Republic status, with an essentially inoperable leadership core. The downward slide is set to increase rapidly unless a major leadership change occurs within the next few years. At that juncture, discussions of real estate bubbles will be essentially academic.