Rent V.s Buy: Knightsbridge

We haven't done one of these in a while but here's an investor trying to either sell or rent out his investment property in Knightsbridge in Century City. First the rental advert:

CENTURY CITY KNIGHTSBRIDGEUltra modern secure 2 bed, 2bath, balcony, indoor gym, heated pool, sauna & steambath, panoramic view, basement parking for 2 cars, R5 990. 1St come, 1st served

And now for the sale advert

CENTURY CITY KNIGHTSBRIDGEUltra modern secure 2 bed, 2bath, balcony, indoor gym, heated pool, sauna & steambath, panoramic view, basement parking for 2 cars, R1.390mil. 1St come, 1st served

So we can rent th place for R5990 a month or buy it for R1.39 million. If you bought that what kind of return could you expect?

Down Payment	Monthly Payment	Cash flow	ROI
R139000	R14213.12	R-8223.12	-70.99%
R278000	R12633.88	R-6643.88	-28.68%
R417000	R11054.65	R-5064.65	-14.57%
R556000	R9475.41	R-3485.41	-7.52%
R695000	R7896.18	R-1906.18	-3.29%
R834000	R6316.94	R-326.94	-0.47%
R973000	R4737.71	R1252.29	1.54%
R1112000	R3158.47	R2831.53	3.06%
R1251000	R1579.24	R4410.76	4.23%
R1390000	R0.00	R5990.00	5.17%

You have to put down R970 000 just to break even and paying the whole thing in cash gets you a 5% return. And remember thats before rates, maintenance and vacancy costs.

Western Cape IOL Index

Price Growth Only 3%

Over the past few months Bank economists have been stating that housing growth for this year was still a respectable 9% (although some said it was a lower 6%). However in this article there's a little factoid that might be of interest:

Premium properties, valued at more than R900 000 and less than R2,5m, in Pretoria and Cape Town recorded the lowest price growth in the country – 3% y/y.

3% growth year over year in property priced over R900 000 (which is pretty close to the average cost of R800 000)? It's a lot worse than I thought.

Banks: Hold On Till 2008!

House price growth running out of steam

House price growth is expected to resume its slowing trend this year due to slower economic growth and the lagged impact of last year's interest rate hikes, a property strategist said.

John Loos, property strategist at FNB Commercial Banking, said that a more sustained strengthening was only anticipated from 2008 on.

By 2008 the US property market is going to be in total meltdown which is going to reverberate through the rest of the world.

You're Never Too Old To Go Into Debt

Reader RS sent in this bit of madness from the UK:

A 102-year-old man has been given a 25 year mortgage for 200 000 pounds.

The pensioner will be 127 if the loan runs to its full term - five years older than the world's longest living person who died at 122.

The man, from East Sussex, faces repayments of 958 pounds a month on his interest-only loan.

Notice that it's an 'interest-only loan'. He probably expects to snuff it before he has to start paying off the capital.

Western Cape IOL Index

This Week's Economist Cover

Inflation Set To Break 6%

Inflation is set to break the 6% limit due to food costs which seem to be going out of control.

Food manufacturers are unleashing a wave of price increases that will make last year's 8% rise in the cost of an average food trolley look tame. With consumption spending sucked into paying for food, the consumer boom is under threat.

The consumer boom is actually a credit boom and there's no way the Reserve Bank can drop rates now. They need to kill consumer spending and they need to do it now or risk people getting into even more debt by merely buying basic foodstuffs.

MoneySkills Implosion To Affect Gauteng Property Market?

Registrar snubs MoneySkills's plan

The possible liquidation of MoneySkills's property could have a noticeable impact on certain areas of Gauteng's residential market.

It is uncertain just how large MoneySkills's portfolio is, but thanks to the gearing that home loans offer, it is likely to be substantially larger than R100m, which is the approximate amount that the company has gleaned from the public.
...
Buys said that most of MoneySkills's properties were sourced from developers. Thus a dearth of new demand and a possible liquidation of existing stock could place pressure on this section of the market, which is already showing signs of cooling.

Building Industry Can't Cope

The building industry can't cope with the demand due to the residential bubble and the upcoming requirements for the 2010 world cup. They can't get supplies and more importantly they can't get trained and skilled artisans. Frankly I wouldn't trust the construction of anything built in the last two to three years as the resident of Mandela Rhodes Place found out the hard way.

Building industry battles with boom

A construction and infrastructure boom has the country's building industries battling to get supplies and skilled personnel.

Shortages span almost everything from cement and civil engineers to construction companies as the country's growing economy, the pressure of a fast-approaching Fifa World Cup 2010, a much-needed housing programme and urgent infrastructure development put pressure on both the government and the private sector to get projects off the ground.

Western Cape IOL Index

Rates To Continue To Rise

Certain banks have been saying lately that the current rate hike cycle is over and rates will remain steady and drop before the end of the year. Not so fast:
Watch that debt - Mboweni will lift rates if necessary

South Africa's cycle of rising rates might not yet be over, Reserve Bank governor Tito Mboweni warned yesterday.

The comment came in his first public speech since the monetary policy committee (MPC) decided on February 15 to keep the official repo rate at 9 percent - after a rise of 200 basis points last year.

"There might be those who think, 'That's the end of it,' and they can start piling up debt again," he told a meeting of the National Consumer Forum.

"If I were you, I would take advantage of this time to get rid of that debt and read just the household balance sheets."

US Headed Towards Recession

We might be focused on the property market in Cape Town but we have to keep our eyes on the US where things are seriously going pear shaped.
Housing Drop May Spur Recession Unless Fed Cuts Rates

Tighter credit standards among mortgage lenders might lower U.S. home prices by 10 percent this year and push the economy into recession if the Federal Reserve doesn't respond by lowering interest rates, Merrill Lynch & Co. said in a report.

Merrill analyst David Rosenberg, who previously forecast the Fed would lower interest rates in the second half of 2007, said there are two possible scenarios. With a rate cut, economic growth will slow to about 1 percent. If rates are left unchanged, and housing prices fall 10 percent, the probability of a recession is ``very close to 100 percent,'' Rosenberg wrote.

If the Fed cuts rates the dollar is going to get killed. Say hello to Mr Recession before the end of the year. That will not have a good effect on housing markets worldwide and will just exacerbate any negative movements here.

Western Cape IOL Index

Rent Discrepancy In Knightsbridge

Here's two ads for two almost identical apartments in the new Knightsbridge apartment. First one that was in the Cape Argus this morning:

CENTURY CITY KNIGHTSBRIDGENew luxury 2 bed, 2 bath. Balcony, basement
parking for 2 cars, indoor pool & gym. R4990pm.

And one from Gumtree:

Very upmarket 2 bedroom flat,2 bathrooms, 92m2, very large balcony, o/p kitchen, living room, dining area, oven hob stove, 2 secure parking bays, swimming pool,steam room, gym, health spa,jacuzzi and sauna in complex.

Basically the same right? So why is the second ad R6900/month while the one from the paper is nearly just a hair under R2000 less a month? Does that second apartment have a better view of the various construction sites and brown lagoon that surround Canal Walk?

(PS I saw a van labelled Teazers packed with bleached blondes pull out of the Villa Italia development. Make of that what you will.)

MoneySkills Scam Shut Down

Registrar freezes MoneySkills’ accounts

The Registrar of Banks has frozen the accounts of property investment scheme MoneySkills and has ordered the repayment of funds to investors. MoneySkills has not communicated this to its investors, who have pumped about R100m into the scheme, but those who call the helpline are told that the company directors are putting together a statement.

Consumers Feeling The Squeeze

Reader RS sent us this link with some bad statistics relating to debt:
Interest rates put brakes on new vehicle sales

But things are beginning to look tough for consumers. This week, it was reported that some households were having difficulty financing their record high debt. Credit card and mortgage debt, reportedly in arrears by three months or more, reflected their plight.

Arrears for credit debt surged 71.5 percent in December last year compared with December 2005. Mortgage debt rose by 18.5 percent year on year. It was reported last year's four interest rate hikes had added about R14 billion a year to the interest cost of outstanding debt.

Credit debt arrears are up 71.5% year over year. That has to be ringing alarm bells somewhere in the Reserve Bank.

Western Cape IOL Index

Credit Tightening By Banks Begins

It's still three months before the introduction of new legislation requiring stricter credit controls at banks but already they're scaling back the 'hard sell' consumers have been hit with as they scrambled to sign people up for credit products (credit cards/bonds/personal loans) before the 1st of June. Here's a bit of a disconcerting quote though:

He added that banks would only contact customers to offer credit where they had assessed that, on the information available to them, they probably had the ability to repay the facility

Which kind of implies to me that all those telemarketing agents (who work on commission let's not forget) have been signing up anyone with a pulse regardless of their actual ability to pay back any debt.