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.

ABSA Excludes Expensive Housing From Affordability Calculations

This little snippet from this article caught my eye:

George accepts Absa's calculations, which show that the average house price is around R900 000. That estimate is based on the monthly mortgage applications Absa approves. Houses costing more than R2.6m are excluded from the calculation to prevent distortions from a couple of very expensive houses on the Cape coast (those of R28m, where the buyer needs to borrow the last R3m).

Anyone who thinks ony a "couple" of houses are being excluded are deluding themselves. I went to PropertyGenie and did a search for property with a minimum price of R2 500 000 in Cape Town and got 373 listings in the past month in the Southern Suburbs alone! Add to that the Atlantic Seaboard, City Bowl and the nicer areas of the Northern Suburbs and that "couple" becomes a couple hundred.

Western Cape IOL Index

Cape Town: Asking Prices Drop

We featured this apartment back in April which was for sale with an asking price of R1 465 000. It's now for sale for R1 395 000 and is 'PRICED TO SELL - ALL OFFERS CONSIDERED '.

Rent Vs Buy: Cape Town CBD

Here's a 'NY style' loft for sale for R2 500 000, currently renting as a business premises for R13 5000 a month.

Down Payment	Monthly Payment	Cash flow	Annual Income	ROI
R0	R28403.51	R-14903.51	R-178842.16
R250000	R25563.16	R-12063.16	R-144757.95	-57.90%
R500000	R22722.81	R-9222.81	R-110673.73	-22.13%
R750000	R19882.46	R-6382.46	R-76589.52	-10.21%
R1000000	R17042.11	R-3542.11	R-42505.30	-4.25%
R1250000	R14201.76	R-701.76	R-8421.08	-0.67%
R1500000	R11361.41	R2138.59	R25663.13	1.71%
R1750000	R8521.05	R4978.95	R59747.35	3.41%
R2000000	R5680.70	R7819.30	R93831.57	4.69%
R2250000	R2840.35	R10659.65	R127915.78	5.69%
R2500000	R0.00	R13500.00	R162000.00	6.48%

If you gear up fully you'll be losing R180 000 and with property over R900 000 achieving a capital appreciation of only 3.3% even capital gains won't help you. If you pay in cash you'll make just under 6.5% ROI. And that's before rates, maintenance and vacancy.

From The Trenches: Parklands

Here's a comment on a previous thread I thought I'd highlight. If you have any other housing related experiences let us know at capetownbubble@gmail.com.

I rented a 2 bedroom duplex in Parklands for a year and two months starting the 1st of January, 2006.

The rental was R2700 per month. The levies were R500 odd per month. The rental agent took 15% (yes, fifteen percent) commission leaving the landlord a nett amount of R1795 per month.

The return on this propert valued at R500 000 property is therefore about 4.5 % which is even worse than what you would get from a multimillion rand property.

When I moved in this complex, there was another duplex for sale for R549 000. It was for sale for over 8 months and then got taken off the market. Seems like there were no takers.

Towards the Oct 2006 another duplex went for sale at R529 000. That was sold in Feb 2007 and I would love to know what selling price was achieved. The owner must have netted below R500 if you take off the agents commission.

In effect, these duplexes are seeing absolutely no capital growth and very low return on investments. And they are situated in a suburb that is offering the best value for money in Cape Town.

When I moved out, the new tenant carried on paying a rental of R2700 per month. So its a year later and the rental has not been increased.

Trevor Manuel Says Stop Spending

Trevor Manuel would just like to remind you to please stop spending as food inflation will probably cause another rate hike soon.

"If people continue to spend like that ... I think we are likely to see the MPC at the Reserve Bank apply its mind and there is only one instrument that they really have, that they have not used for a long time -- that is, to tighten interest rates," he said. Rising food and fuel costs have added to pressure on inflation, pushing factory gate prices higher and the targeted CPIX inflation measure up towards the upper end of the bank's 3% to 6% target band.

Cape Town: 23rd Most Expensive City In The World

Cape Town is now supposedly the 23rd most expensive city in the world, at least when it comes to 'prime property'.

Prime residential property in the seaside city of Cape Town costs on average €4 500 (R42 151.04) per square metre.

If US Crashes, Low Interest Rates Won't Save SA

FNB Economist John Loos has gone into CYA (that's 'check your ass') mode. He claims that the SA property market is fine. However on the off chance the US property market craters then not even cutting interest rates will save SA.

He says that a key risk, “ironically”, to South Africa’s residential property market lies in an economic scenario that could include interest rates declining.

This risk “emanates from the troubled US housing market which, if it experiences a major collapse, could throw our global ‘soft landing’ base case forecast out and sent the world economy towards recession”.

Well let's see in the US so far there are over 60 mortgage financers that have gone out of business and still over a trillion dollars of subprime mortgages have yet to reset. Looks like that major collapse is on the way then.

Western Cape IOL Index

Rent Vs. Buy: The Square

Here's a bachelor flat for sale for R570 000, with a tenant paying R3 300 a month in rent (minus R350 for rates). Is it a good rental investment?

Down Payment	Monthly Payment	Cash flow	Annual Income	ROI
R0	R6476.00	R-3526.00	R-42312.01
R57000	R5828.40	R-2878.40	R-34540.81	-60.60%
R114000	R5180.80	R-2230.80	R-26769.61	-23.48%
R171000	R4533.20	R-1583.20	R-18998.41	-11.11%
R228000	R3885.60	R-935.60	R-11227.21	-4.92%
R285000	R3238.00	R-288.00	R-3456.01	-1.21%
R342000	R2590.40	R359.60	R4315.19	1.26%
R399000	R1942.80	R1007.20	R12086.40	3.03%
R456000	R1295.20	R1654.80	R19857.60	4.35%
R513000	R647.60	R2302.40	R27628.80	5.39%
R570000	R0.00	R2950.00	R35400.00	6.21%

Break even with R340 000 down? 6.21% rental yield when paying in cash? And that's before maintenance and vacancy.