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

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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