Western Cape IOL Index

Investment Properties That Aren't: Durbanville

Oh-oh looks like someone might have realised that their Durbanville "investment" property wasn't exactly making them any money. It's on the market for R640 000 (but that's negotiable so go ahead and lowball) and is rented out for R2850. The ROI before rates and maintenance is

Down Payment	Monthly Cash Flow	ROI
R160000	R-3119	-23%
R320000	R-1129	-4%
R480000	R860	2%
R640000	R2850	5%

5%? Why that's almost as good as a fixed deposit! But considering that most of the people in these newly built developments are only putting down a deposit of 10%-20% (or less if they convice the banks to give them a 100% loan) I'm sure this seller got tired of losing R3 000 a month.

Investment Properties That Aren't: Tamboersklookf

Here's a 2 bedroomed apartment in Tamboerskloof going for a cool R1 100 000. And look they've already got a tenant lined up paying R3 800 a month in rent. Here's your return on income before paying rates and maintenace:

Down Payment	Monthly Cash Flow	ROI
R100000	R-8635	-104%
R300000	R-6148	-25%
R500000	R-3661	-9%
R700000	R-1174	-2%
R900000	R1313	2%
R1100000	R3800	4%

4% with R1 100 000 invested? I'll take two! But let's give the buyer a bit of a break. Let's assume he manages to get R200 000 knocked off the price and gets the place for R900 000.

Down Payment	Monthly Cash Flow	ROI
R100000	R-6148	-74%
R300000	R-3661	-15%
R500000	R-1174	-3%
R700000	R1313	2%
R900000	R3800	5%

A massive 1% increase on ROI. You'll be rich.

Atlantic Seaboard: Prices Drop

Over at Cape Property Services, Tom Hood's latest November 2006 housing report has a number of suprises:

Prices of sectional title property were virtually unchanged on average last month and about 4% up on a year ago. However, on the Atlantic Seaboard, prices of flats dipped 11% on average in a month to R1 990 000 and were about 3% lower than a year ago.

Investment Properties That Aren't: Gardens

Here's a house in Gardens in Cape Town. You can buy it for R2 500 000 (R29 289 a month with our soon to be 13% interest rate), or you can rent it for R12 5000, nearly R17 5000 cheaper than buying a month. If you were to buy it as an 'investment' property here's your return on income.

Down Payment	Monthly Cash Flow	ROI
R100000	R-15267	-183%
R400000	R-11859	-36%
R700000	R-8451	-14%
R1000000	R-5042	-6%
R1300000	R-1634	-2%
R1600000	R1775	1%
R1900000	R5183	3%
R2200000	R8592	5%
R2500000	R12000	6%

You'd have to put down a massive R1 400 000 to break even and the entire cost of the property to make 6% a year ROI. Not exactly scintillating returns is it?

Western Cape IOL Index

Housing under R500 000 offer the best returns

Houses under R500 000 will offer the best returns in 2007

The best yields in the property market will be found in the lower-priced segment ie, houses under R500 000, next year.

This is according to Rode & Associates CEO, Erwin Rode in the latest Rode Report.

He pointed out that during the third quarter of 2006, lower-priced houses continued to grow faster than those in the middle- and upper-priced sectors.

What's R500 000 going to buy you in Cape Town at the moment? A one bedroomed flat in Table View? If you work in town I hope you don't mind 1+ hour commutes.

Mboweni Vs. The Banks

Who will it be - Mboweni or the banks?

The current residential property market resembles a crazy court case, with the complainant, SA Reserve Bank governor Tito Mboweni, pleading for a cooling down in the escalation of credit - which includes bonds on homes - to help him contain inflation.

The estate agency industry and those who advance money to borrowers are opposing the motion, which could, if it succeeds, cut their profits.

Average South Africans who can currently afford to borrow money, and who will be affected by the outcome, should be in the gallery, but they're elsewhere, spending money as if it's going out of fashion, seemingly oblivious of the hikes in inflation.

Mboweni is perhaps worried that many of the bond increases granted weren't spent on improving the homes they were borrowed against, but on furniture, holidays and cars, which aren't income producers.

Guest Post: Could a housing slump help you get that dream house ?

[Note: This is a guest post by reader CJ]

Here's an interesting thought - what is best for your average home owner that aspires to a bigger and better house ? A reduction in house prices or an increase in house prices ?

Lets say life is going well and I can afford to get a 2 bedroomed house in Cape Town's city bowl. It costs me R2 m. I would love to get that incredible 4 bedroomed house but at R4 m it is just too expensive. I can't stretch to an extra R2m.

A year passes. I continue to yearn for that bigger and better house. Suddenly, in a puff of smoke, my fairy godmother appears - she can do one of 2 things for me, she says - she can create a boom and make house prices double or she can create a crash and make them lose half their value. Which choice would get me closer to my dream house ?

Naturally, one would assume that a doubling of prices would be best. Heck, you would be R2m richer, that has to be a good thing doesn't it? Well, yes, if your dream was to sell the house and go cruising around the world … but that is not my dream - what I want is that gorgeous 4 bedroomed house. In that case, strange as it may seem, a house price drop makes it more obtainable.

Take a look at the maths -

	Price of present house	Price of dream house	Total Amount I need to borrow to get dream house
Now	2	4	4
Double	4 (gained 2m)	8	6
Half	1 (lost 1m)	2	3

So if house prices double I need to find an extra R6m on top of the R2m of easy money I made to get the dream house - if finding 2m extra was tough, getting 6m will be impossible - sadly the dream house must remain just that, a dream.

However look at what happened after the crash. I may have lost R1m when I sell my house but for another R2m I can get the dream house - I might just be able to stretch to that - so for a total outlay of R3m the dream comes true.

Everyone thinks that as house prices rocket they will get closer to their dream house. In reality, the opposite occurs. As prices rise the cost of upgrading to something better becomes increasingly prohibitive. In other words, for the hard working Joe Average who is aspiring to get something bigger, a house price crash could well be an excellent thing.

The people who will really suffer are the speculators who have geared their borrowings to the max in the hope of flipping their houses in a year or two for a hefty profit. When interest rates go up and house prices go down, they are in serious trouble and there will be blood on the streets. But then again, that is why it is called speculation.

At the end of the day, if a decent amount of your bond has been paid off and you are ready to upgrade your lifestyle, a crash shouldn't be something to fear, it might just be the answer to your dreams.

Western Cape IOL Index

Property Fraud Alert

Check out this scam:
Property scheme raises warning flags

A scheme doing the rounds promises to build up a passive income of R168 000 within one year. All that’s required is a monthly salary of R7 000 and a clean credit record.

Notice that bit about a clean credit record because it's going to come in handy when you commit credit fraud.

The first is a trick Optimum uses to maximise clients’ borrowing power. Van Wyk identifies four low-value properties he thinks are suitable for the purposes of the scheme. He then uses a mortgage originator to obtain quotes from each of the big four banks for each of the four properties.

He then accepts the quotes for the properties, but ensures that each is from a different bank. Each bank approves the loan, apparently unaware that three other banks are concurrently approving loans of equal value. This allows Van Wyk’s clients to borrow four times more than banks would normally allow them to. Van Wyk says he understands that there are moves afoot by the banks to close this apparent loophole – in the meantime, however, he is making hay while the sun shines.

Yeah that's totally not going to come back and bite you. And the whole scheme relies on property prices increaseing

Van Wyk says that after a year, his clients apply to the banks for bond re-financing. Of course, this is subject to the properties increasing in value over the period, and therein one finds the greatest risk to Optimum’s scheme.

And if you can't re-finance? Oops looks like you've got four mortages to pay.

Western Cape IOL Index

Dockside: Investment Properties That Aren't

What do you do if you can't sell your 'investment property' for R1.45 million? Why you rent it out for R5000/month. Now let's assume that our seller wants to make 25% profit since he bought it during pre-construction. That means he probably bought it for around R1.1 million. So what's his ROI?

Down Payment	Monthly Cash Flow	ROI
R100000	R-5873	-70%
R300000	R-3671	-15%
R500000	R-1469	-4%
R700000	R733	1%
R900000	R2935	4%

A whopping 4% return for paying nearly the entire price in cash. With inflation about to hit 6% you're only losing 2% a year in real terms.

And unless you've got more than R350 000 as a down payment you can kiss your 10% deposit goodbye by the end of next year.

Incentives Make An Appearance

Reader RS writes

I saw an ad in the Southern Mail (dated 28 Nov) last week where a property was being sold for 1.4 mil in Durbanville and the agent is offering a second property (a flat) for FREE.

That's quite an incentive.

Rate Hikes Up 0.5%

The pain of a fourth rate hike

Each time interest rates are raised half a percentage point, people say it’s small - but the reality is that the cost of borrowing at prime has gone up by 19% since June.

The prime rate has risen from 10,5% to 12,5% pa. Monthly payments on a bond financed at prime, have risen nearly 14% in six months. On a million rand bond, that comes to R1 377 a month.

In June, when prime was at 10,5% pa, the mortgage payments on an R1m bond were R9 984 a month. Following rate hikes of 50 basis points each in June, August, October and December, servicing and repaying such a bond now costs a borrower R11 361 a month.

Similarly for a R600 000 bond, payments increased R827 in six months to R6 817.

What was a bit worrying to me was the 73% of household income that goes towards paying debt. 73%!!!

Could SARB tighten the rates screws?

Could SARB tighten the rates screws?

Since interest rate policy this year caught analysts off guard more than once, one cannot help wondering what surprises are in store for the market, which confidently expects a 50 basis point rate hike on Thursday. Analysts nevertheless point out that anything other than a rate rise of this magnitude could spell disaster.

I expect a 50bp rate hike, but after every single rate hike we always get analysts predicting "disaster!" if the rates go up again. And yet consumer spending is still higher than expected.

Estate Agents: "We're begging you please keep buying!"

Want that bigger home? Now is the time

Now is the time to buy if you are looking to upgrade to a bigger property. This is the message from economists and estate agents, as property prices level off in what has become more of a buyer's market in recent months.

Sure thing. I love catching falling knives! Interest rate set to go up on Thursday, and with credit levels going through the roof, are set to continue to go up in the 2007. Why buy now when you can wait a year or two for the market to soften up even further.

Data released by the South African Reserve Bank showed that mortgage advances had increased by 30.9 percent in October compared to the same month last year, Absa's economist, Jacques du Toit, said in the bank's latest property report.

People are extracting money out of their bonds as quickly as possible and if house prices do not rise a lot of people will be left underwater on their bonds. Best quote though is this:

They say it may not be long before the market faces further price hikes in the run-up to the 2010 World Cup.

Yeah tell that to the residents of Green Point who are fighting tooth and nail (probably unsuccessfully) to prevent the building of the World Cup stadium their. They must hate property price appreciation! Is there any data out there showing the World Cup (or the Olympics for that matter) boosting property prices or is this just a complete thumbsuck? I can understand hotel and holiday accomadation rates going up but no one is going to buy a flat and expect to pay it off over the one month of the competition.

Guest Post: Blowing bubbles in the Cape Town Property Market

[Note: The following is opinion piece is by regular reader CJ]

It is important to remember that the people who should be telling us the truth, might be holding back on us. Let us take a closer look.

First there are all the property ‘experts’ that are dragged out at regular intervals by the media to make proclamations. Have you noticed that they all work formajor banks. In a property crash the banks will be the first to feel the pain as borrowers default on repaying bonds on homes with negative equity. Do you think they are going to be totally honest with us if the answer hurts their employer? “Hey guys, I’ve got to admit, the housing market is looking rather dodgy at present, might be a good time to offload that house while you still can … oops … can’t say that, might cause our customers to panic … well, what I actually mean is, the market is presently going through a period of consolidation but over the long term we anticipate continued growth …”.

So maybe the newspapers will tell us the truth ? So that would be the same papers that sell advertisements to estate agents in property supplements that are as thick as telephone directories. You think these guys are going to upset their cash cow by telling us some unpleasant truths ?

Then of course there are the estate agents – that noble band of business folk that weren’t happy just selling us places to live, they now sell us ‘investments’ … and charge us an exorbitant 7.5% for placing a few ads in the papers. I know of one ‘investment’ that was sold 4 times over 18 months – that’s 30% commission, a nice little earner. With rich pickings like this it is not surprising that their numbers have multiplied 4 fold in recent years. You think they are going to tell you that the party is over ? Come the crash more than half of them are going to be unemployed.

Will our political leaders tell us ? Well the world’s governments are certainly worried as they see the warning signs and they are definitely concerned, but the politicians are also being careful not to panic their populations into a crash, as inevitably recession will follow. They are all desperately trying for a soft landing. This is all very well but if you look at the graphs of real house prices (house prices adjusted for inflation), the present peaks are so incredibly high to anything previously seen that talk of a soft landing is as likely as a jumbo jet that has run out of fuel gliding gently down to the runway.

Finally, as in any bubble, a lot of people have got rich by doing nothing but owning a house. I know one city bowl house that is now valued at 900% more than it was sold for 10 years ago with only minor improvements. Telling your average home owner that anything that goes up that quickly can just as easily come down, is not something they want to know. House prices always go up, they say, everyone knows that. Do they ? The Japanese might disagree – their property market crashed in the early 90s and 16 years later values are still only half what they were at the peak.

Housing has become a commodity like gold, oil, tech shares, or tulips. As long as there is some sucker willing to pay more for a commodity than you paid, the price will keep going up. When the suckers dry up, then I am afraid the sucker is you.

Western Cape IOL Index

Property prices hardly moving

Property prices hardly moving

Growth in property prices may have slightly ticked up in October and November but residential property prices are virtually stagnating, warned Standard Bank.

It said volatility in the monthly housing data masked the strong downward trend but the housing market continues to slow.