Asking Rents Drop

One of the theories put out there by some is that as the housing bubble collapses rents will go up as people will start to rent over the long term commitment of buying a house. That might hold true when rental stock was in low supply and demand outstripped it. The problem is that the housing bubble grew on the backs of wannabe buy-to-let specuvestors who didn't care that the rent fell short of covering the bond (because capital appreciation is what they were counting on), or who kept the flat empty as they tried to sell their off-plan purchase once constructed. When that doesn't work they either have to keep it empty or try and rent it out and cover some costs. The result: a whole bunch of rentals on the market (especially in new developments) and rents either remaining flat or dropping.

For instance here's a 2 bed apartment in the Mutual Heights development. The asking rent in November was R12 000. In December the asking rent for the same flat was R11 000 a month.

The Edge: Rent Vs. Buy

The Edge (probably the kakkest name for an apartment block ever) is an old friend here at Cape Town Property Bubble, we've talked about it many time before. And it's still a terrible "investment" if you're a wannabe buy-to-let specuvestor. For instance a 2 bedroomed, 62m^2 apartment rents for R6 5000 a month, while the selling price of an apartment of the same dimensions (also 62m^2 and 2 bedroomed) is R1 395 000.

Now usually we don't include the rates payable each month but in this case we do know it and it's R1357.00 a month which is pretty high for a 62m^2 apartment. So that means your net income is R4843. Just looking at that I can tell the ROI is going to be terrible so here goes:

Down Payment	Monthly Payment	Cash flow	Annual Income	ROI
R0	R17855.97	R-13012.97	R-156155.63
R139500	R16070.37	R-11227.37	R-134728.46	-96.58%
R279000	R14284.78	R-9441.78	R-113301.30	-40.61%
R418500	R12499.18	R-7656.18	R-91874.14	-21.95%
R558000	R10713.58	R-5870.58	R-70446.98	-12.62%
R697500	R8927.98	R-4084.98	R-49019.81	-7.03%
R837000	R7142.39	R-2299.39	R-27592.65	-3.30%
R976500	R5356.79	R-513.79	R-6165.49	-0.63%
R1116000	R3571.19	R1271.81	R15261.67	1.37%
R1255500	R1785.60	R3057.40	R36688.84	2.92%
R1395000	R0.00	R4843.00	R58116.00	4.17%

4.17% ROI if you pay for everything in cash and a whopping R1 000 000 deposit needed just to break even on the rental. OUCH.

But here's an interesting point. In May 2006, over a year and a half ago, the selling price of a 2 bed, 1 bath apartment in The Edge was R1 300 000. Today the asking price is R1 395 000. That's a capital appreciation of barely 7% over 18 months. If you bought that apartment for R1 300 000 back in May 2006 and rented it for R6 500 a month your ROI would be:

Down Payment	Monthly Payment	Cash flow	Annual Income	ROI
R0	R17791.97	R-12948.97	R-155387.63
R139000	R16012.77	R-11169.77	R-134037.26	-96.43%
R278000	R14233.58	R-9390.58	R-112686.90	-40.53%
R417000	R12454.38	R-7611.38	R-91336.54	-21.90%
R556000	R10675.18	R-5832.18	R-69986.18	-12.59%
R695000	R8895.98	R-4052.98	R-48635.81	-7.00%
R834000	R7116.79	R-2273.79	R-27285.45	-3.27%
R973000	R5337.59	R-494.59	R-5935.09	-0.61%
R1112000	R3558.39	R1284.61	R15415.27	1.39%
R1251000	R1779.20	R3063.80	R36765.64	2.94%
R1390000	R0.00	R4843.00	R58116.00	4.18%

Again that's a pretty dismal rental yield even with the lower purchase price. Now let's assume you geared up fully and got a 100% bond like a proper specuvestor. Sure you've lost R155 387 because you had to cover the bond but capital appreciation has got you covered right? Well considering the asking price has only increased R95 000 and even if you managed to achieve that full asking price, you've still lost R40 000 in 18 months! In fact unless you put down a greater than R400 000 downpayment even capital appreciation will not make you any money! Then subtract agency commission and other selling costs and the losses are even more.

One Property, Three Agencies, Three Prices

Here's a home in Kalk Bay listed with three different agents and going for three different prices (in reality only two but play along...)

RE\Max - R2 595 000
De Kock Estates - R2 400 000
Kalk Bay Property - R2 395 000

That's a full R200 000 difference between the lowest and highest asking price.

Saturday Open Thread

Got a topic you want to talk about? Use the comments below.

A Rare Spotting Of The Lesser Spotted Specuvestor

I don't know who Stuart P. is but he sure is desperate to sell a whole bunch of properties.

URGENT SALE!!!!!!!!!!!URGENT SALE!!!!!!!!!PUT AN OFFER IN TODAY...LOVELY 2 BED

INVESTORS!!!!!!!!INVESTORS......perfect location........heart of Claremont

URGENT SALE!!!!!!!!!!!!!!!PERFECT FOR INVESTORS!!!!!!OPPOSITE TYGERVALLEY SHOPPING CENTRE

MODERN AND STYLISH CBD APARTMENT, 511 THE SQUARE...........DESPERATE SELLER

PERFECT FOR LOVING COUPLE......................COSY 1 BED....OPPOSITE RACE TRACK

He could be an agent but judging by the desperate wording on these ads I doubt it.

The Square: If It Won't Sell For R570 000 I'm Sure It Will For R635 000

Back in May we spotlighted an apartment in a new complex called The Square which was a 29m^2 bachelor on sale for R570 000 and renting for R3 300. Today I noticed an ad also for a 29m^2 bachelor in The Square and also renting for R3 300 a month, except now the asking price is R635 000, R65 000 more than 7 months ago.
I'd bet this is the exact same flat.

So why would the price increase if the flat remains unsold? Well if you consider that our seller is probably paying in money every month to cover the bond that is not paid for by the rent; then every month that goes by he loses more money and thus has to sell for a higher price to make a profit. But by raising the price all our seller does is ensure that the flat remains unsold and he continues to pay every month. In 7 months time another price hike will probably be required to cover the newly accrued losses since the last hike.

The new asking price is also especially high when you consider a 61m^2 2 bedroom apartment in the same block is on sale for R839 000.

For any investor who would be looking to buy the place the ROI is now even worse when you consider the price has increased, interest rates have increased but rent has stayed the same.

The Retirement Village: Perfect For The Youngsters

Here's the text of an ad for a rental in the Oasis retirement complex in Century City:

Newly built 2 bedroom, 2 bathroom apartment in retirement village, with underfloor heating, 24hr Security, Club House, Indoor heated Swimming Pool, Restaurant, Sauna, Steam Room, Gym, Library, Billiards Room, Outdoor Braai Area 5 min walk to Canal Walk

Young and Old Welcome

Available: Immediately

Young welcome? I guess the population of pensioners willing to shell out R7 000 a month for rent is a lot less than expected and they need to spread the net a little wider.

Rent Vs Buy: City Bowl

A 25m^2 bachelor apartment in Kloof Street going for R460 000 and renting for R2200. Usually I would expect a high yield in a bachelor, especially one that small but with that asking price it's going to be mediocre.

Down Payment	Monthly Payment	Cash flow	Annual Income	ROI
R0	R5887.99	R-3687.99	R-44255.88
R46000	R5299.19	R-3099.19	R-37190.29	-80.85%
R92000	R4710.39	R-2510.39	R-30124.70	-32.74%
R138000	R4121.59	R-1921.59	R-23059.11	-16.71%
R184000	R3532.79	R-1332.79	R-15993.53	-8.69%
R230000	R2943.99	R-743.99	R-8927.94	-3.88%
R276000	R2355.20	R-155.20	R-1862.35	-0.67%
R322000	R1766.40	R433.60	R5203.24	1.62%
R368000	R1177.60	R1022.40	R12268.82	3.33%
R414000	R588.80	R1611.20	R19334.41	4.67%
R460000	R0.00	R2200.00	R26400.00	5.74%

You need to put well over 50% downpayment to break even and paying in cash gets you 5.74%. And again this is before rates, maintenance and vacancy.

Rent Vs. Buy: Temple House

Back in October 2005 you could have bought a 2 bedroom/2 bathroom apartment in Temple House for R1 850 000. Today you can rent one for R9500 a month. Here's the ROI table:

Down Payment	Monthly Payment	Cash flow	Annual Income	ROI
R0	R23679.96	R-14179.96	R-170159.50
R185000	R21311.96	R-11811.96	R-141743.55	-76.62%
R370000	R18943.97	R-9443.97	R-113327.60	-30.63%
R555000	R16575.97	R-7075.97	R-84911.65	-15.30%
R740000	R14207.98	R-4707.98	R-56495.70	-7.63%
R925000	R11839.98	R-2339.98	R-28079.75	-3.04%
R1110000	R9471.98	R28.02	R336.20	0.03%
R1295000	R7103.99	R2396.01	R28752.15	2.22%
R1480000	R4735.99	R4764.01	R57168.10	3.86%
R1665000	R2368.00	R7132.00	R85584.05	5.14%
R1850000	R0.00	R9500.00	R114000.00	6.16%

Just over 6% ROI if you pay for the whole thing in cash and over a million needed just to break even on cash flow.

Open Thread

Got a topic you want to talk about? This thread is all yours.

Reserve Bank Hikes Rates 0.5%

We totally forgot to report that rates went up 50bps on Wednesday. The repo rate is now 10% with prime rate sitting at 14.5%.

Urgent Sale Ads Increasing

Is it just me or is the number of ads containing the words "urgent sale" growing at a bit of a pace. In August there was perhaps one ad every 3 days. There have been 20 alone since the beginning of this week. I'm sure there will be more tomorrow and on the weekend.

Rent Vs. Buy: De Waterkant

The De Waterkant has some of the worst price:rent ratios in Cape Town. Anyone who has bought an 'investment' property there in the last two years has speculated purely on capital appreciation not on rental yield to make money. For instance here's a two bedroomed duplex on sale for R1 950 000. An equivalent duplex in the same block, also two bedrooms but 18m^2 smaller though, rents for R6 500 a month. That's a big disconnect between price and the underlying rental fundamentals.

I don't even have to run the numbers to tell you the ROI will be horrendous if you bought that apartment to rent out at the asking rental. But here goes:

Down Payment	Monthly Payment	Cash flow	Annual Income	ROI
R0	R24248.66	R-17748.66	R-212983.87
R195000	R21823.79	R-15323.79	R-183885.48	-94.30%
R390000	R19398.92	R-12898.92	R-154787.10	-39.69%
R585000	R16974.06	R-10474.06	R-125688.71	-21.49%
R780000	R14549.19	R-8049.19	R-96590.32	-12.38%
R975000	R12124.33	R-5624.33	R-67491.93	-6.92%
R1170000	R9699.46	R-3199.46	R-38393.55	-3.28%
R1365000	R7274.60	R-774.60	R-9295.16	-0.68%
R1560000	R4849.73	R1650.27	R19803.23	1.27%
R1755000	R2424.87	R4075.13	R48901.61	2.79%
R1950000	R0.00	R6500.00	R78000.00	4.00%

4% ROI if you pay for the whole thing in cash. What's that 3% less than inflation? 6% than a good fixed deposit? And just to break even you need to put down a whopping R1.4 million. Eina!

I Think I'm Underpaid

Here's the text from an ad for a house in Tamboerskloof. Read it and pay special attention to the emphasised part.

Set in a treed garden with avocado and lemon trees, this 3 bedroom home has well preserved features such as marble fireplaces, Oregon floors and spacious reception rooms with high ceilings. In addition, there is secure off street parking and a large cellar. Indoor and outdoor living from country style kitchen to sunny patio and garden. In need of some renovation, this property is a wonderful investment for young families or couples.

For young couples and families so it should be affordable right?

Now go look at the asking price. R3 195 000. What young family or couple could possibly afford these monthly payments? Especially for a house that would require even more money to be spent on it for renovations?

% Deposit	Down Payment	Monthly Payment
0%	R0	R39730.49
10%	R319500	R35757.44
20%	R639000	R31784.39
30%	R958500	R27811.34

Even if our young couple paid a 20% down payment (a whopping R639 000) they would be paying close to R32 000 a month to the bond. That would mean that their househould income would have be about R100 000 a month, following the guideline that you shouldn't pay more than 1/3 of your salary for your bond.

The market of young couples earning that kind of cash has got to be extremely small. Either that or I am being seriously underpaid.

Inflation breaks 7%

Inflation breaks 7%

Year-on-year consumer price inflation excluding mortgage rates (CPIX) rose to 7.3 percent in October from 6.7 percent in September, Statistics SA said.

A rate hike in December is a certainty now and with such a massive increase we might see continued hikes into 2008.

Chase The Market Down

If you're going to drop the price of your languishing property, at least drop the price. A R5000 drop from R1 700 000 to R1 695 000 is nothing more than an attempt to get Private Property to advertise your flat as "Price Reduced!".

Oooh a 0.3% price decrease, now I'm definitely interested.

Why I'm Not Planning On Buying In A New Development

I've talked before on this blog about the level of worksmanship taking a serious decline in new developments due to a number of reasons

• Limited number of skilled builders
• Developments go up as quickly as possible = rush jobs
• Developers love to cut corners

And heres's some proof from this Facebook group, Faircape Victims, started by none other than Cape Town Tourism's ex CEO Sheryl Ozinsky:

I purchased a new property from Faircape Property Developers. This was the first time that I had bought from a developer. There were loads of snags which for the most part were repaired. More recently, I had to get an engineer in to inspect the large cracks that had developed in my apartment and others. The engineer was brought back a few months later when my travertine tiles started to pop. Both snags were due to building omissions. Faircape have agreed that the snags are their responsibility but will only settle 50% of the costs. What has your experience been like with Faircape? I hope better than mine.

If It Won't Rent At R5000 I'm Sure It Will At R6000

Remember that bachelor flat in Four Seasons with an asking rent of R5000 a month (compared to a 2 bedroomed apartment in the same block with a rent of R5750 a month)? Well the ad now has an asking rental price of R6000 a month. I guess rising interest rates are starting to hurt, and I'll bet they'll hurt a lot more when that flat continues to stand empty.

Green Point Price Disparity

Why is there a R250 000 difference in price between this ad on Gumtree (R650 000) and the agent's own page (R900 000)?

Century City: Asking Prices Drop

Back in September we showcased a 1 bedroomed flat in Century City going for R799 000 with a horrendous 2.2% ROI if you bought it with cash. Now it's price has dropped R20 000 to R780 000 but what is now extremely interesting is that the rent earned has suddenly gone up R500 from R3000/month to R3500/month. That smells extremely fishy.

Rent Vs. Buy: Observatory

If there's one area in Cape Town where I thought rental yields might be decent it would be Observatory. But this messed up housing market surprises even me. Here's a 3 bedroomed semi-detached house going for R870 000 with a "potential rental" of R3100.

Down Payment	Monthly Payment	Cash flow	Annual Income	ROI
R0	R10818.63	R-7718.63	R-92623.57
R87000	R9736.77	R-6636.77	R-79641.22	-91.54%
R174000	R8654.90	R-5554.90	R-66658.86	-38.31%
R261000	R7573.04	R-4473.04	R-53676.50	-20.57%
R348000	R6491.18	R-3391.18	R-40694.14	-11.69%
R435000	R5409.32	R-2309.32	R-27711.79	-6.37%
R522000	R4327.45	R-1227.45	R-14729.43	-2.82%
R609000	R3245.59	R-145.59	R-1747.07	-0.29%
R696000	R2163.73	R936.27	R11235.29	1.61%
R783000	R1081.86	R2018.14	R24217.64	3.09%
R870000	R0.00	R3100.00	R37200.00	4.28%

4.3% ROI before rates, maintenance and vacancy if you buy for cash. A +70% down payment needed just to break even on rental.

Tourists Get The Shaft In Green Point

Check out these 6 videos of a trio of German tourists going round their holiday apartment pointing out everything that is broken (chairs, windows, doors) and dirty (wait for the shower mat in the 6th video). They are not impressed.

And this holiday apartment is right opposite the new World Cup stadium in Green Point. Gives one hope for the future.

http://youtube.com/watch?v=KTtasmLaO_4
http://youtube.com/watch?v=KZBnuH1VePY
http://youtube.com/watch?v=SvWi2QLrn80
http://youtube.com/watch?v=lwGtGMJKgdg
http://youtube.com/watch?v=bbnT6sgLP8k
http://youtube.com/watch?v=F4ihfrM7Ljw

Rate Hike In December

There will be a rate hike this December for sure.

Mboweni: 'I would definitely increase rates in December'

The Governor of the Reserve Bank, Tito Mboweni, gave a very strong signal that another interest hike is on the way when he told members of Parliament that in his opinion, rates should go up.

Speaking to the finance portfolio committee on Wednesday, Mboweni said: "If I was the only member of the Monetary Policy Committee (MPC), I would definitely increase rates in December."

Why Are Property Developers Turning Into Landlords?

Aquacor is a CT based property developer. They've just completed Metrolpolis which has been shoehorned onto a piece of land with two other developments (and the whole thing with these apartment blocks smooshed into one another like a wedding cake collision looks u g l y).

Now if you have a look at these rental ads (1, 2, 3, 4) you'll notice that in the email address it's Aquacor renting these apartments. So why is a property developer, who has to sell the units to realise the greatest profit, renting them out?

Rent Vs. Buy: Sea Point

Here's a one bedroomed apartment for sale for R815 000 and currently renting for R4200 (minus R450 for levies).

Down Payment	Monthly Payment	Cash flow	Annual Income	ROI
R0	R10134.69	R-6384.69	R-76616.34
R81500	R9121.23	R-5371.23	R-64454.70	-79.09%
R163000	R8107.76	R-4357.76	R-52293.07	-32.08%
R244500	R7094.29	R-3344.29	R-40131.43	-16.41%
R326000	R6080.82	R-2330.82	R-27969.80	-8.58%
R407500	R5067.35	R-1317.35	R-15808.17	-3.88%
R489000	R4053.88	R-303.88	R-3646.53	-0.75%
R570500	R3040.41	R709.59	R8515.10	1.49%
R652000	R2026.94	R1723.06	R20676.73	3.17%
R733500	R1013.47	R2736.53	R32838.37	4.48%
R815000	R0.00	R3750.00	R45000.00	5.52%

Cash flow neutral at R500 000 down? 5.5% ROI (less then inflation) if you pay in cash?

Spotlight On Durbanville

Reader TM sent us some more info on a house in Durbanville he has his eye on.

I have noticed that this house in Durbanville has had 4 price drops since August. Total drop R200,000.00 or 16%.

Price :R 1195,000
Date : 2007-08-29

Price : R 1150,000
Date : 2007-09-28

Price : R 1128,000
Date : 2007-10-31

Price : R 995,000
Date : 2007-11-05

And Speaking Of Four Seasons

Why rent a 43 square meter bachelor for R5000 a month when you can rent a 2 bedroom/2 bathroom apartment for R5750?

Four Seasons: Full Of Specuvestors?

Does anyone have any information on the Four Seasons development in Buitenkant Street? Looking through Gumtree I noticed that since the beginning of October there are 9 apartments for sale and 22 apartments for rent. Those are just off Gumtree so I expect more properties listed elsewhere. Sounds like a bit of a specuvestor hotspot to me but I'm all ears if anyone can tell me anything more about the place.

How Not To Write An Ad

Check out this ad for a flat in the Cape Town CBD:

Rough and ready city apartment with secure parking

Highly rentable bachelor apartment in the CBD legal district. Good rental return. This block is a little hectic so only for the non emotional investor. BIG BONUS is secure parking on title with excellent rental up to R1000pm. I can send you pics and details. Flat needs renovating but will rent as is.

"Rough and ready"?? "This block is a little hectic"?? "Non emotional investor"?? "Needs renovating but will rent as is"???

Definitely sounds like a trouble free investment. Have fun collecting rent there. But hey it's got secure parking, but from the sounds of it you need to worry about the people in the block...

Asking Price Reduction In Durbanville

A big thank you to readers who send in data about housing markets they have their eyes on. Reader TM sent in this list of properties he's been keeping hie eye on in Durbanville.

Ref	Price	Date
44183	R1750000	23/10/2007
44183	R1550000	31/10/2007
45027	R3100000	22/08/2007
45027	R2995000	31/10/2007
45340	R3300000	23/10/2007
45340	R2900000	31/10/2007
45343	R1895000	23/10/2007
45343	R1750000	31/10/2007
45649	R2100000	04/09/2007
45649	R1995000	31/10/2007
45729	R1650000	28/09/2007
45729	R1600000	31/10/2007
45770	R929000	01/10/2007
45770	R899000	23/10/2007
MP100321	R3300000	08/10/2007
MP100321	R2899000	31/10/2007
MP100370	R1195000	29/08/2007
MP100370	R1150000	28/09/2007
MP100370	R1128000	31/10/2007
MP104471	R1295000	23/10/2007
MP104471	R1225000	31/10/2007
MP104875	R640000	08/10/2007
MP104875	R620000	31/10/2007
MP104881	R945000	08/10/2007
MP104881	R915000	31/10/2007
MP104913	R3000000	01/10/2007
MP104913	R2650000	31/10/2007
MP106388	R749000	08/10/2007
MP106388	R699000	31/10/2007
MP107358	R1295000	23/10/2007
MP107358	R1285000	31/10/2007
MP108685	R2200000	23/10/2007
MP108685	R1900000	31/10/2007
MP110395	R1275000	29/10/2007
MP110395	R1250000	31/10/2007
MP110965	R2200000	23/10/2007
MP110965	R1900000	29/10/2007
MP59155	R1195000	14/09/2007
MP59155	R1125000	23/10/2007
MP69431	R699000	01/10/2007
MP69431	R679000	31/10/2007
MP76164	R566000	14/09/2007
MP76164	R549000	31/10/2007
MP76188	R1800000	10/09/2007
MP76188	R1695000	08/10/2007
MP84556	R970000	06/09/2007
MP84556	R935000	31/10/2007
MP85047	R1660000	30/08/2007
MP85047	R1599000	08/10/2007
MP85047	R1590000	31/10/2007
MP88765	R1195000	14/09/2007
MP88765	R1080000	01/10/2007
MP89563	R899000	06/09/2007
MP89563	R890000	31/10/2007
MP92627	R850000	14/09/2007
MP92627	R800000	23/10/2007
MP94027	R2750000	22/08/2007
MP94027	R2395000	31/10/2007
MP94265	R1175000	20/09/2007
MP94265	R1150000	31/10/2007
MP95379	R1895000	14/09/2007
MP95379	R1849000	18/10/2007
MP95379	R1799000	31/10/2007
MP96294	R1100000	08/10/2007
MP96294	R1075000	23/10/2007
MP96302	R1975000	22/08/2007
MP96302	R1925000	14/09/2007
MP99543	R795000	22/08/2007
MP99543	R750000	14/09/2007
MP99543	R725000	31/10/2007
MP99547	R1895000	22/10/2007
MP99547	R1750000	31/10/2007
MP99548	R3300000	08/10/2007
MP99548	R2899000	23/10/2007

90K Price Drop In Two Days

Here's a 2 bedroom house with 3 attached flatlets. On the 29th of October the asking price was R1 280 000. On the 31st of October the price is down to R1 190 000 and the seller is 'motivated'. Now according to the ad you could be earning close to R10 000 a month on rent if you rented everything out and if the seller bought for less than the current asking price they should be easily cash flow positive. So why sell?

25K Rent For Cartwrights Corner?

Nothing smells more of a desperate specuvestor trying to cover their bond than an ad asking for R25 000 in rent for a 2 bedroomed apartment.

And you call that a kitchen?

Asking Prices in Durban

Reader SZ sent us this spreadsheet of asking prices on houses he's been keeping his eye on in Durban. It seems like people are deciding it's better to die by a large number of small cuts than rather price downward in one big cut. I call that catching a falling knife. A number in green means that the price was reduced from some higher price. A number in red means that the property was removed from the market and then brought back on, an old trick agents use to pretend like the property is brand new on the market.

Escombe	10 Cowell St, Queensburgh	810000	790000	760000
New Germany	32 Lewis Walter St	760000	760000
The Wolds	11 Glockner St	785000	765000
Waterfall	142 Valley drive	850000	830000	800000
Westville	58 Severn Drive	900000	850000	800000
The Wolds	8 Janine St, New Germany	795000	775000
Crestview	44A Rainbow Drive, Waterfall	930000	895000
Escombe	20 Philips Rd, Queensburgh	770000	770000
Caversham Glen	17 Plymouth Rd, Pinetown	795000	750000	740000
Malvern	9 Rodney Rd, Queensburgh	850000	830000

Interest Rates Going Down? Don't Bet On It.

Inflation won't be tamed any time soon - Moody's

Moody's, the international ratings agency, yesterday poured cold water on hopes that inflation would soon be tamed.

It said household spending could have more steam than initially expected, raising the possibility that inflation may remain outside the Reserve Bank's target band of between 3 percent and 6 percent for longer than previously thought.

Reserve Bank Raises Repo Rate 50bps

Mboweni raises repo rate

South Africa's central bank raised its key repo rate by 50 basis points to 10.5 percent on Thursday, above expectations, as inflation remains above the target range and despite a slowdown in some economic indicators.

The half percentage point rise is the third this year and brings to 350 basis points the increases since June last year to tame rising inflation pressures, partly driven by food and fuel costs, and robust consumer spending.

Only seven of 19 economists polled by Reuters last week forecast rates would rise on Thursday.

But But... The World Cup!

Ah the 2010 World Cup. It's the perfect reason to buy a property for R395 000 with a tenant renting for R1 700/month. It doesn't matter if the property is located over 40km from the nearest world cup venue (with only one of the most congested highways in the city between you and the stadium) or that it has a pititful 5% ROI (before rates, maintenance and vacancy cotsts) when paid for entirely in cash. I mean the World Cup right? It says so in the ad. It has to be a good investment.

Down Payment	Monthly Payment	Cash flow	Annual Income	ROI
R0	R4769.13	R-3069.13	R-36829.56
R39500	R4292.22	R-2592.22	R-31106.60	-78.75%
R79000	R3815.30	R-2115.30	R-25383.65	-32.13%
R118500	R3338.39	R-1638.39	R-19660.69	-16.59%
R158000	R2861.48	R-1161.48	R-13937.74	-8.82%
R197500	R2384.56	R-684.56	R-8214.78	-4.16%
R237000	R1907.65	R-207.65	R-2491.82	-1.05%
R276500	R1430.74	R269.26	R3231.13	1.17%
R316000	R953.83	R746.17	R8954.09	2.83%
R355500	R476.91	R1223.09	R14677.04	4.13%
R395000	R0.00	R1700.00	R20400.00	5.16%

Property Price Growth: Less Than Cash

Standard Bank reported (via RealEstateWeb) property price inflation was 5.7% year on year. That's less than cash. That kind of growth is a death knell to speculators. They're relying on double digit inflation to make up for their horrendous rental returns, which in most cases for newly bought flats is cash flow negative before taxes, maintenance and vacancy.

Rent Vs. Buy: The Rockwell

The Rockwell is complete (despite 20% of the apartments still being on sale) and rental units are also now available.

A 1 bedroomed unit is renting for R 5 500 while the cheapest 1 bedroomed unit I can find for sale costs R1 520 000.

Down Payment	Monthly Payment	Cash flow	Annual Income	ROI
R0	R18352.10	R-12852.10	R-154225.14
R152000	R16516.89	R-11016.89	R-132202.63	-86.98%
R304000	R14681.68	R-9181.68	R-110180.11	-36.24%
R456000	R12846.47	R-7346.47	R-88157.60	-19.33%
R608000	R11011.26	R-5511.26	R-66135.09	-10.88%
R760000	R9176.05	R-3676.05	R-44112.57	-5.80%
R912000	R7340.84	R-1840.84	R-22090.06	-2.42%
R1064000	R5505.63	R-5.63	R-67.54	-0.01%
R1216000	R3670.42	R1829.58	R21954.97	1.81%
R1368000	R1835.21	R3664.79	R43977.49	3.21%
R1520000	R0.00	R5500.00	R66000.00	4.34%

Meanwhile a two bedroomed unit is renting for R7 500 and the cheapest I could find an equivalent one for is R1 810 000.

Down Payment	Monthly Payment	Cash flow	Annual Income	ROI
R0	R21853.48	R-14353.48	R-172241.78
R181000	R19668.13	R-12168.13	R-146017.60	-80.67%
R362000	R17482.79	R-9982.79	R-119793.42	-33.09%
R543000	R15297.44	R-7797.44	R-93569.25	-17.23%
R724000	R13112.09	R-5612.09	R-67345.07	-9.30%
R905000	R10926.74	R-3426.74	R-41120.89	-4.54%
R1086000	R8741.39	R-1241.39	R-14896.71	-1.37%
R1267000	R6556.04	R943.96	R11327.47	0.89%
R1448000	R4370.70	R3129.30	R37551.64	2.59%
R1629000	R2185.35	R5314.65	R63775.82	3.92%
R1810000	R0.00	R7500.00	R90000.00	4.97%

In both cases you've got to put over a million in down payment just to get positive cashflow and that's before rates, maintenance and vacancy. And those sub 5% ROIs don't exactly look promising.

Rent Vs. Buy: Century City

Here's a flat for sale in Villa Italia in Century City. Asking price is R799 000 and it's tenanted for the next six months. "Great!" you say "what's the rental income?". How about R3 000 a month. Less monthly levy R806.71 and monthly rates about R350. That comes to a whopping R1843 rental income. I actually don't want to calculate the yield here because I know it's going to be horrible but here goes...

Down Payment	Monthly Payment	Cash flow	Annual Income	ROI
R0	R9646.92	R-7803.92	R-93647.08
R79900	R8682.23	R-6839.23	R-82070.78	-102.72%
R159800	R7717.54	R-5874.54	R-70494.47	-44.11%
R239700	R6752.85	R-4909.85	R-58918.16	-24.58%
R319600	R5788.15	R-3945.15	R-47341.85	-14.81%
R399500	R4823.46	R-2980.46	R-35765.54	-8.95%
R479400	R3858.77	R-2015.77	R-24189.23	-5.05%
R559300	R2894.08	R-1051.08	R-12612.93	-2.26%
R639200	R1929.38	R-86.38	R-1036.62	-0.16%
R719100	R964.69	R878.31	R10539.69	1.47%
R799000	R0.00	R1843.00	R22116.00	2.77%

Egads! 2.77% ROI when you pay in cash and R700 000 needed just to break even. What an investment. I'll take two!

Buy My House Then Let Me Rent From You

This ad is hilarious. The seller wants to sell the house to you for R850 000, then rent it from you for R3500 a month. What's that? 1/3rd of the cost of the bond? At least you don't have to search for a tenant right?

Down Payment	Monthly Payment	Cash flow	Annual Income	ROI
R0	R10262.68	R-6762.68	R-81152.22
R85000	R9236.42	R-5736.42	R-68837.00	-80.98%
R170000	R8210.15	R-4710.15	R-56521.77	-33.25%
R255000	R7183.88	R-3683.88	R-44206.55	-17.34%
R340000	R6157.61	R-2657.61	R-31891.33	-9.38%
R425000	R5131.34	R-1631.34	R-19576.11	-4.61%
R510000	R4105.07	R-605.07	R-7260.89	-1.42%
R595000	R3078.81	R421.19	R5054.33	0.85%
R680000	R2052.54	R1447.46	R17369.56	2.55%
R765000	R1026.27	R2473.73	R29684.78	3.88%
R850000	R0.00	R3500.00	R42000.00	4.94%

5% ROI when you pay cash and break even at a mere R600 000 down. Meanwhile our seller puts his R850 000 in a 9% fixed deposit and the interest pays the rent and he still has R35 000 left over at the end of year for a nice holiday.

Gordon Institute of Business Science: Property bubble collapse "could be severe"

Associate Professor in Finance and Economics Adrian Saville from the University of Pretoria Gordoon Institute of Business Science wrote the following about the SA property market:

In short, not only is SA residential property over-valued, but the economic conditions and the market psychology on which a property price bubble thrive are in place.

If we are in a bubble, then the implications are potentially significant. The collapse of a bubble would have adverse wealth effects, which in turn would place a brake on consumer spending. Where property has been financed through debt, the effects on individuals’ balance sheets could be severe.

Thanks to Chuckmeister who posted this link in our comments section. I thought I'd highlight it on the front page.

Same House: Two Prices

Here's two listings for the same 4 bedroomed house in Kalk Bay with a R250 000 price difference between the two.

REMax - R2 950 000
Engel & Volkers - R3 200 000

Banks: Prices are going to double! We swear!

Moneyweb has another article full of bank economists promising housing prices are going nowhere but up!

Doubling your money in 5 years

Want to turn R500 000 into R1m in 5 years? Property - particularly affordable housing - is the place to be.

That's according to those who are ploughing big money into bricks and mortar, like property developers. But even life assurers, who have an interest in promoting other asset classes and investments, are seeing the returns to be had in property.

People with a vested interest in prices going up are saying prices will go up? Who would've guessed.

As I asked in the comments section of that article:

Are salaries going to double in 5 years time as well? Or will those entering the market then (todays 17-20 year olds) be straight out of luck and destined to rent forever?

Somehow I doubt it.

Meanwhile: "South Africa's net savings rate is currently below zero, making the country even more dependent on foreign flows to fund economic growth."

Up and Down and Up

This apartment has been on sale since April 2007 (if not earlier). It was initially for sale for R1 465 000, then reduced to R1 395 000 and now is back up to R1 425 000. Because when no one wants to buy at R1 395 000 your best bet is to raise the price R30 000.

Rent Vs. Buy: CBD

We haven't done any of these for a while. And remember the rental income is before rates, maintenance, taxes and vacancy.

Upmarket Apartment In the Cbd For Sale: Sale price R1 575 000. Currently rented for R5700.

Down Payment	Monthly Payment	Cash flow	Annual Income	ROI
R0	R19016.15	R-13316.15	R-159793.82
R157500	R17114.54	R-11414.54	R-136974.43	-86.97%
R315000	R15212.92	R-9512.92	R-114155.05	-36.24%
R472500	R13311.31	R-7611.31	R-91335.67	-19.33%
R630000	R11409.69	R-5709.69	R-68516.29	-10.88%
R787500	R9508.08	R-3808.08	R-45696.91	-5.80%
R945000	R7606.46	R-1906.46	R-22877.53	-2.42%
R1102500	R5704.85	R-4.85	R-58.14	-0.01%
R1260000	R3803.23	R1896.77	R22761.24	1.81%
R1417500	R1901.62	R3798.38	R45580.62	3.22%
R1575000	R0.00	R5700.00	R68400.00	4.34%

Fully leveraged you're only going to lose R160 000 a year. And even if you pay the full asking price you'll get a whopping 4.34% annual return on investment. Even putting down a R1 million downpayment loses you money...

Buyers Market? Hardly

In a bid to get someone to buy a house business banks are already calling it a buyers market in the residential property sector. Please don't believe the bulldust. It's a buyers market when prices have reverted to the historical mean and sellers are still forced to discount. A 6 year property bubble does not unwind in 3 weeks.

Reserve Bank Raises Rates

Prime lending rate is now 13.5%. And there's another on the way.

An Anecdote

privateproperty.co.za sends me an email with the properties that are on show in the areas I am tracking. Usually it's one property every month or so. Today's email? Four.

Selling A House Becoming Difficult

Homeowners struggling to sell their property

Three out of four residential properties are now being sold for less than the asking price and the average time a home remains on the market before it is sold has increased from eight to 10 weeks.

Jan Kleynhans, the chief executive of First National Bank (FNB) Home Loans, yesterday attributed changes in the market predominantly to the implementation of the National Credit Act in June and the cumulative effect of interest rate hikes over the past year.

Market activity is now at its lowest level since the inception of the FNB Property Barometer survey in 2003.

Why Is No One Buying This Fantastic Opportunity?

Back in June we spotlighted this house for sale for R1 050 000 (and renting for R4500, with 5% ROI), with the ad claiming that the property price would double in less than four years. Of course we wondered why anyone would sell such a fantastic investment returning 25% per annum. Well guess what, it's still for sale. I wonder why no one is buying. That 25% growth is in the bag! And with that R4500 rental income you'll only be losing R65 000 a year with 20% downpayment.

And So It Begins...

Property prices tumble

Residential property prices have tumbled since May, according to Standard Bank's (JSE:SBK) latest Residential Property Gauge - but the bank's economists say there is no cause for alarm.

The bank says there is probably a "bit of a problem with the data", with the National Credit Act (NCA) among the factors skewing the picture.

According to Standard Bank's figures, released last week, the median house price fell back to R585 000 in July, down from R620 000 in June - a drop not far off 6%. The figure for May was R600 000.

A 6% drop in a month?!?!? But of course according to the banks everything is peachy keen.

Two More Rate Hikes Coming

Market expects two more rate hikes

Banks expect interest rates to rise in the short term. They are currently paying nearly a percentage point more for 12-month funding than they are for three. This indicates that they are expecting two more 50 basis point rate hikes, says Coronation (JSE: CML) money market manager Tania Miglietta.

Rate Hike One The Way

SA credit growth quickens, rate hike looms

Growth in demand for credit by South Africa's private sector quickened to 24,92% year-on-year in June, data showed on Tuesday, hardening the case for another interest rate increase next month.

The Reserve Bank said credit demand growth was a touch faster than May's 24,84% increase, while during the same period, the broadly defined M3 measure of money supply grew by 23,35% compared to 22,67% the previous month.

Thank You Telkom

Well it took over two weeks but eventually Telkom reconnected my ADSL. We'll be back in action shortly.

Asking Prices Drop

Reader TVM has been keeping track of a number of houses over the past few months and has been noticing some asking price declines.

Price Now	Price Before	Change in Rands	% Change
4000000	4500000	-500000	-11.11
1640000	1969000	-329000	-16.71
275000	324000	-49000	-15.12

Western Cape IOL Index

R300 000 Price Drop

Reader B from Zim(!) sent us this link from Durban: I have dropped original asking price by R300 000.

The Greater Fool Theory In Action

The Greater Fool Theory is the idea tha no matter how overpriced an asset is or how disconnected it's value from the unerlying fundamentals are, it's worth buying as long as there is a greater fool than yourself willing to buy it. And here's a perfect example on sale for R1 050 000:

...remember that it is predicted by the banks that the value of houses will double over the next four years, this house in four years will be worth R2,160,000:00 not even interest in the banks can match that, and what will it cost you to gain that growth, call me and I will tell you. At present the property has a tenant at R4,500:00 pm rental income.

Wow! In four years it will double in price to over R2 million! So... uh... why are you selling? You're throwing away R250 000 a year in appreciation!

Maybe it's because you're earning R4 500 a month in rent. With a purchase price of R1 050 000 your potential buyer is barely making 5% ROI with R700 000 deposit just to break even at cashflow. And if the price doubles? I suspect the next buyer after that will have bit of a hard time suddenly doubling the rent...

Down Payment	Monthly Payment	Cash flow	Annual Income	ROI
R0	R12301.54	R-7801.54	R-93618.54
R105000	R11071.39	R-6571.39	R-78856.69	-75.10%
R210000	R9841.24	R-5341.24	R-64094.83	-30.52%
R315000	R8611.08	R-4111.08	R-49332.98	-15.66%
R420000	R7380.93	R-2880.93	R-34571.12	-8.23%
R525000	R6150.77	R-1650.77	R-19809.27	-3.77%
R630000	R4920.62	R-420.62	R-5047.42	-0.80%
R735000	R3690.46	R809.54	R9714.44	1.32%
R840000	R2460.31	R2039.69	R24476.29	2.91%
R945000	R1230.15	R3269.85	R39238.15	4.15%
R1050000	R0.00	R4500.00	R54000.00	5.14%

Rent Vs. Buy: Stellenbosch

2 bedroom flat being marketed as student accomodation (and that means maintenance costs are a lot more). Asking price R965 000, rents for between R3 800 and R4 500 a month. Let's give them the benefit of the doubt and say it rents for R4 500.

Down Payment	Monthly Payment	Cash flow	Annual Income	ROI
R0	R11305.71	R-6805.71	R-81668.47
R96500	R10175.14	R-5675.14	R-68101.62	-70.57%
R193000	R9044.56	R-4544.56	R-54534.77	-28.26%
R289500	R7913.99	R-3413.99	R-40967.93	-14.15%
R386000	R6783.42	R-2283.42	R-27401.08	-7.10%
R482500	R5652.85	R-1152.85	R-13834.23	-2.87%
R579000	R4522.28	R-22.28	R-267.39	-0.05%
R675500	R3391.71	R1108.29	R13299.46	1.97%
R772000	R2261.14	R2238.86	R26866.31	3.48%
R868500	R1130.57	R3369.43	R40433.15	4.66%
R965000	R0.00	R4500.00	R54000.00	5.60%

5.6% ROI. Break even on cash flow (before rates and maintenance... a whole lot of maintenance) at R580 000 down. As the ad says "GREAT INVESTING OPPORTUNITY".

Western Cape IOL Index

Rent Vs Buy: Kraaifontein Property Portfolio.

Here's something strange, an entire property portfolio up for sale comprising 3 free standing homes and 3 apartments located in Kraaifontein. Asking price is R3 255 000 and the rental income is R17 700 a month. What kind of returns should you expect if you bought this portfolio?

Down Payment	Monthly Payment	Cash flow	Annual Income	ROI
R0	R38134.79	R-20434.79	R-245217.47
R325500	R34321.31	R-16621.31	R-199455.73	-61.28%
R651000	R30507.83	R-12807.83	R-153693.98	-23.61%
R976500	R26694.35	R-8994.35	R-107932.23	-11.05%
R1302000	R22880.87	R-5180.87	R-62170.48	-4.77%
R1627500	R19067.39	R-1367.39	R-16408.74	-1.01%
R1953000	R15253.92	R2446.08	R29353.01	1.50%
R2278500	R11440.44	R6259.56	R75114.76	3.30%
R2604000	R7626.96	R10073.04	R120876.51	4.64%
R2929500	R3813.48	R13886.52	R166638.25	5.69%
R3255000	R0.00	R17700.00	R212400.00	6.53%

Ow. You need to put down a R1.8 million just to break even on cashflow. And this is before rates and maintenance (and Kraaifontein ain't exactly known for the workmanship of it's houses). Paying for the whole thing in cash gets you 6.53% ROI. Which is about 2% less it would earn sitting in the bank.

More Wishful Thinking Rent Prices

2 bed/2 bath flat in the CBD - R12 000 a month. I've seen flats in Clifton rent for less.

3 bed/2 bath flat in Knightsbridge at Century City - R11 000. Oh oh... someone needs to cover their mortgage. We were given a rent pricelist for Knightsbridge a few months ago and 3 beds were going for R7 000, and even that is a stretch in my opinion.

How long do you think this will stay empty?

Here's a two bedroomed apartment for rent in Woodstock. Asking rental is only R15 000 a month. What a bargain! Me thinks that landlord is doing a bit of wishful thinking. Never mind that similar properties in Woodstock barely get past R4 500 a month. I've seen 4 bedroomed houses in Camps Bay rent for less.

Western Cape IOL Index

Golf Estates Decline In Value

Here's a first. An article actually talking about a decline in property prices.

Golf estate prices in the rough
Five years ago golf estates were setting new price records in South Africa. However, that seemingly insatiable appetite for big-ticket properties in luxury developments appears to have waned somewhat, with price growth in many of the more established golf estates slumping to less than 10% over the past year.

The recent slowdown from the dizzy heights seen two to three years ago has admittedly been off a high base. Nevertheless, latest house price data of the Knowledge Factory's SA Property Transfer Guide (SAPTG) shows that in some estates prices have even dropped.

But property only goes up!?!

Interest Rates Going Up

Interest rates are going up by at least 50bp bringing the repo rate to 9.5%. Although I wonder what are the odds of a 100bp hike?

Western Cape IOL Index

Inflation Above 6%

Inflation has broken the 6% barrier. I would say that a rate increase is almost certainly on the way with a good chance of another one following that.

South Africa's targeted CPIX inflation quickened to 6,3% in the year to April, breaching the central bank's 3% to 6% target for the first time since August 2003.

Figures from Statistics South Africa also showed that the all-items consumer price index (CPI) increased by an annual rate of 7% in April, compared to 6,1% in March

SA Property Price Index Graph

In the comments to a story over at Moneyweb someone posted SA residential real estate index data. I can't vouch for the accuracy of the data but the graph I created does reflect past growths and declines.



That run up since 2001 is looking mighty scary. It's also interesting to note that the index only grows by compounded annualised return of 1.72%. So much for property being a great investment.

Update

Compare that graph to this graph depicting the US housing market index (which is currently melting down).

South Africans Owe More Than The Government Will Spend

Okay this is just a tad worrying.

Household debt higher than SA's budget

South African households owe more on their home loans, car repayments, personal loans, furniture accounts and credit cards than the government has committed to spending on running the country in the current budget.

Total debt is estimated at R680-billion, while Finance Minister Trevor Manuel set aside R600-billion in February for, among other priorities, education, health, housing and servicing its own debt.

Credit card debt, according to Gabriel Davel, the national credit regulator, has seen a dramatic increase of 138 percent since 2004 while lease agreements rose by 123 percent in the same period.

Western Cape IOL Index

Buy To Let Investors in Trouble

Buy-to-let investors bail out

Buy-to-let investors - particularly those who recently entered at the top of the market - have started to offload rental properties as many battle to service mortgage repayments on the back of higher interest rates and lower income yields.

Affordability issues are also forcing more potential first-time homeowners to rent rather than buy.

And because there's so many buy-to-let specuvestors despite the increased number of renters, rents themselvs are flat and not increasing.

Key question is where to find buy-to-let stock for less than R500 000. Joannou says CBD fringe areas such as Rugby, Brooklyn and Woodstock are good buys.

I drive to Brooklyn on my way to work in the mornings. If people are expecting to attract hassle free tenants there good luck.

Aengus MD Richard Rubin says it makes more sense for buy-to-let investors to buy in the inner city than in the northern suburbs of Johannesburg. Rubin says while the CBD may have been regarded as a no-go area for investors a few years ago, the northern suburbs are in fact now the riskier bet.

Rubin says inner city investors can earn an average income yield of 11%/year while investors in Sandton generally have to be satisfied with no more than 5%. Inner city investors can expect to boost monthly rental income by 20% to 25% by letting furnished apartments.

I read an article earlier this year in Finweek where Rubin claimed to be getting yields of 18%. Now he's getting 11% and also trying to sell some of his rental stock.

However, CBD investors aren't all doing equally well. Those who recently bought upmarket luxury apartments in Cape Town's CBD aren't seeing the returns initially anticipated. Joannou says upper-end CBD investments have generally been overpriced and investors are lucky to get yields of 3%/year.

3% yield a year! And with property over R900 000 appreciating at a pitiful 3% a year that has got to hurt.

Rent Vs. Buy: Gordon's Bay

You can buy for R699 000 or rent for R3 800.

Down Payment	Monthly Payment	Cash flow	Annual Income	ROI
R0	R7941.62	R-4141.62	R-49699.47
R69900	R7147.46	R-3347.46	R-40169.52	-57.47%
R139800	R6353.30	R-2553.30	R-30639.58	-21.92%
R209700	R5559.14	R-1759.14	R-21109.63	-10.07%
R279600	R4764.97	R-964.97	R-11579.68	-4.14%
R349500	R3970.81	R-170.81	R-2049.73	-0.59%
R419400	R3176.65	R623.35	R7480.21	1.78%
R489300	R2382.49	R1417.51	R17010.16	3.48%
R559200	R1588.32	R2211.68	R26540.11	4.75%
R629100	R794.16	R3005.84	R36070.05	5.73%
R699000	R0.00	R3800.00	R45600.00	6.52%

Need to put down R400 000 just to break even with the mortgage payments. And that's before rates, maintenance and vacancy. If you gear up you're losing R50 000 a year. You need 7% in property appreciation to break even. Even more once you take off agent fees and other transaction costs.

I've seen rents for newly built two bedroom flats in Gordon's Bay rent for as low as R2 200 in the past year though.

Western Cape IOL Index

Another Interest Rate Hike Is On The Way

Despite the constant pleading from Reserve Bank Governor Tito Mboweni and Minister of Finance Trevor Manuel, the South African consumer is continuing to spend like crazy.

No stopping SA's buying mania

South African retail sales growth jumped to 10.1% year-on-year in March, official data showed on Wednesday, pointing to consumer spending staying high and backing a case for higher interest rates.

StatsSA said retail sales quickened from an annualised 8.0% in February, and increased by 9.3% in the three months to the end of March compared to the same period the previous year.

Maybe Tito will grow a pair and hike it by a full percentage this time.