02 December 2006

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.

5 comments:

Unknown said...

I have followed this blog for a while and I appreciate your thoughts (especially as I think along the same lines).

From the research I have seen, largely conducted by the Unilever Institute at UCT, we won't have a black middle class in any real sense of the term for at least another 15 years. That excuse is debunked.

This is the final phase of a world wide property boom, fueled by cheap money and short memories. I would argue the sort of contagion we saw during the Asian property bubble during the late 90's had means to become a global pandemic in our present. In this year construction activity in Spain was equivalent to that of the rest of Europe, based on a roaring property market. That cannot continue. There are lots of simularities to the Western Cape, not least an attitude of running fast and loose with the facts.

Anecdotaly, friends who bought in places like Riebeek-Kasteel and Piketberg are seeing signs of trouble ahead. Those markets are stagnant, and they are now, in the case of Piketberg, terrorized by weekend gangs from Cape Town. Seemingly, the innovative criminals can also commute longer distances to work.

I don't believe we will decouple from a global collapse in property prices. What we do need, desperately, are ways to hedge against the coming collapse. Gloating about being right will not do the trick. We need to advise people who have been sucked into this mess on the best way to deal with it. If we do not, banks will come up with their best gambit to date, fixed rate mortgages as a "hedge".

The sad reality is that the banks were the real investors during all of this, while most home owners are at most unsophisticated speculators who were persuaded to make giant bets with borrowed money. This is tragic.

Anonymous said...

Welcome Raymond – In my opinion the really clever speculators are already out – if you are over extended and were relying on flipping your property then the best advice would be to sell quickly (even at a loss) and be the first one out before the rush starts – if you bought a house for the old fashioned reason to live in it and plan to remain in it for a long time, then it doesn’t matter if the value goes down, as long as you can afford the increased repayments when rates go up.

Personally I just got sick of all the hype and ‘property porn’ out there and it seemed to me no one was showing a balanced picture - I have been banned from talking about it at dinner parties so this is my way of getting it off my chest and hopefully getting the word out that these are dangerous times in the world of property and that the days of easy money are over.

I mentioned in my piece that SA newspapers are not telling us the full story – well one of the few local newspapers that doesn’t rely on property advertising money is the Sunday Times so they do occasionally give us an indication of the rocky times ahead …

I see in today’s edition, Elna Moolman of Standard Bank says “ house prices are stagnating as expected. I don’t think there is any risk of house prices falling but they will remain at these high levels for the next 6-9 months”.

She doesn’t mention what will happen to these “high levels” after 9 months, but the article then says that salaries must increase to catch up with the sharp rise in house prices before prices can rise further.

I see … so let me get this right – the ratio between median house price and median salary is presently 18. It should be 3, so that means salaries must increase by 600% before the correct ratio is once again reached. If inflation continues to remain at 6% then that will require 31 years of house price stagnation for salaries to catch up so that prices can finally start rising again …. or … maybe Ms Moolman of Standard Bank is being a little guarded with the truth here and the whole process WILL be speeded up by house prices actually DROPPING …

How much will they drop, you ask ? Who knows – past real estate crashes in the US have seen land drop as much as 90%. Lets just say a 50% drop followed by 10 years of stagnation would do nicely to get the SA figures back to where prices should start rising again …

Anonymous said...

Here's a graph of the UK housing market, going back to 1952.

Make of it what you will...

http://img65.imageshack.us/img65/2803/recessionsandthehousingcycle9t.gif

Anonymous said...

Excellent graph – so basically, after the last 3 housing peaks in the UK, within 3 years the ratio between salaries and house prices was back to a normal level of 3.4. We have no reason to believe it won’t happen again with the latest peak – the main difference this time is that the peak is much higher than it has been before so the drop is going to be even more severe.

There are only 2 ways to get back to a ratio of 3.4 within those 3 years –

1/ Wages can go up 70%. With inflation running at a few percent in the UK this is extremely unlikely.

2/ house prices must drop 40%

Some are declaring that ‘things are different nowadays’ … there won’t be a drop. This is to be expected as this phrase is ALWAYS uttered at the top of any bubble. For those of us that believe history and patterns repeat themselves, there is absolutely no question – the UK market IS going to crash, just like the US is starting to do now.

There will be recessions, maybe even depressions worldwide … payback for 6 years of a wild global property bubble. Amongst all this chaos it will take a brave man to believe that South Africa’s overpriced property is not going to join in the plunge …

Anonymous said...

This is actually very funny. can you imagine what rental yields will be when property values go up by 85% in 4 years???

http://www.property24.com/Property24/news/FullArticle.asp?articleid=4450