Interest Rate Surges But Repo Rate Remains Constant

The Consumer Price Index(CPIX) surged again this month but the Reserve Bank has elected to keep repo rates steady for the first time since June 2006, I suspect because of the current energy crisis. That being said if inflation continues to rise Monetary Policy Committee will be stuck between a rock and an extremely hard place.

If You Want To Sell Drop Your Price At Least 10%

Reader RS sent us this article from The Property Magazine. Right at the bottom they mention this little nugget:

Consumers who want to sell their property in a hurry are urged to list it at 10% below what they wanted to achieve in December last year.

They of course go on to say what a buying opportunity that is for potential buyers but really, who wants to catch a falling knife?

Forced Sales Surge 75%

From Business Day: Pinched homeowners scramble to sell

THE number of overstretched property owners losing their homes under the hammer has risen to record levels.

The Alliance Group of auctioneers said yesterday forced home sales surged 75%. It had experienced a 300% increase in inquiries from sellers trying to offload their properties “as quickly as they can”.

Alliance Group CEO Rael Levitt said the company had experienced a 300% increase in enquiries this month compared with January last year.

According to Levitt, the worst is yet to come.

Bo-Kaap: After A Year On Sale Another Price Drop

We last saw this house in February 2007. Back then we noticed how it was listed first for R1 800 000 and then R1 600 000. Well it's almost a year later and it's still on sale but the price has dropped another R100 000 to R1 500 000 (a 17% drop from R1 800 000) and I don't think that's going to help much considering the length of time it's been sitting.

Rent Vs. Buy: University Estate

Here's a house in University Estate that is for sale for R1 195 000 or the owner is willing to rent it out for R4 800 a month. If you were to buy at the asking price and could get the going rent what kind of ROI can you expect?

Down Payment	Monthly Payment	Cash flow	Annual Income	ROI
R0	R15295.97	R-10495.97	R-125951.68
R119500	R13766.38	R-8966.38	R-107596.51	-90.04%
R239000	R12236.78	R-7436.78	R-89241.34	-37.34%
R358500	R10707.18	R-5907.18	R-70886.18	-19.77%
R478000	R9177.58	R-4377.58	R-52531.01	-10.99%
R597500	R7647.99	R-2847.99	R-34175.84	-5.72%
R717000	R6118.39	R-1318.39	R-15820.67	-2.21%
R836500	R4588.79	R211.21	R2534.50	0.30%
R956000	R3059.19	R1740.81	R20889.66	2.19%
R1075500	R1529.60	R3270.40	R39244.83	3.65%
R1195000	R0.00	R4800.00	R57600.00	4.82%

4.82% return if you pay in cash and a 70% downpayment required just to break even. And that's before you deduct maintenance, rates and vacancy costs.

The Rockwell: More Developers Become Landlords

We've mentioned before how certain new developments in Cape Town have not sold out and this has led to the developer having to rent out those unsold apartments, which is not the optimal outcome for them. Well it seems to be happening again at our old friend The Rockwell. If you look at their available properties page you'll count 26 unsold apartments (out of a total of 150, a 17% vacancy).

And by some coincidence there are the same number of apartments to rent:

I have approx 25 apartments to rent in the The ROCKWELL
I represent the developer and our rental price are market related, and ready to be occupied.

If I was a buy-to-let investor at The Rockwell I would be extremely nervous. Competing with the developer for tenants when they have much more space to reduce asking rentals if required is not going to be pretty.

Rent Vs. Buy: Tyger Valley

Here's a listing for an urgent sale of an apartment in Tyger Valley. It's for sale for R820 000 (but supposedly is valued at R900 000) and has a new tenant in for 1 year paying R3 600 a month. Here's the ROI:

Down Payment	Monthly Payment	Cash flow	Annual Income	ROI
R0	R10495.98	R-6895.98	R-82751.78
R82000	R9446.38	R-5846.38	R-70156.60	-85.56%
R164000	R8396.79	R-4796.79	R-57561.42	-35.10%
R246000	R7347.19	R-3747.19	R-44966.25	-18.28%
R328000	R6297.59	R-2697.59	R-32371.07	-9.87%
R410000	R5247.99	R-1647.99	R-19775.89	-4.82%
R492000	R4198.39	R-598.39	R-7180.71	-1.46%
R574000	R3148.79	R451.21	R5414.47	0.94%
R656000	R2099.20	R1500.80	R18009.64	2.75%
R738000	R1049.60	R2550.40	R30604.82	4.15%
R820000	R0.00	R3600.00	R43200.00	5.27%

5.27% return when paying in cash is pretty abysmal. Break even is just below a 70% down payment. And that's before rates, maintenance and vacancy.

There is another problem with this listing besides the dismal ROI. Supposedly it's an urgent sell, so then why did the seller sign a new contract with a tenant for a year? That greatly limits the potential buyers to other 'property investors' and even then they will be more reluctant to buy a flat with an agreed upon rental they had no part in negotiating, a tenant they did not vet personally and 11 months still on the lease. Big mistake in my opinion.

Standard Bank: Year-on-Year House Price Growth for Dec 2007 Was 0%

From Standard Banks Residential property gauge(PDF):

House price growth as measured by Standard Bank’ median house price1 index was recorded at 0.0% y/y in December 2007. In level terms the median house price
was recorded at R550,000. The December outcome brought the five-month moving
average growth rate to 5.6% y/y.

Here are some graphs from the report (All copyrights remain with Standard Bank). First up house price growth:
If you bought a R1 000 000 house in December 2006 with no money down, you've just given the bank R140 000 to rent your house. You've made no capital gains and all the money you have paid has gone to pay off the interest.

To recover those losses house prices have to rise 14% at least, but forecasts for next year on in the low single figures, if not negative (which is looking more possible every month). Which means you'll lose even more money in 2008. Even putting a 20% down payment has cost you R123 000, and that's money you have a very slim chance of getting back unless you tough it out in your new purchase for at least 7 years.


Next up looks look at mortgage advances:
Mortgage advances are still sky high. The close to 25% of bondholders who took out mortgage advances in 2007 who assumed rising property prices would cover them taking on new debt are going to be in for a suprise. If they try and sell in the near future I would guess they have to bring money to the table to cover the shortfall on what they owe and what the house is now worth.



And finally here's a graph of debt rations and insolvencies:
Notice how the 'Debt repayment to income ratio' grah has usually been a leading indicator(1999-2003). In 2003 the housing bubble kicked in and debt started a uphill trundle while insolvencies remained low. This is probably related to the private sector borrowing graph above. Everyone was "Hey I don't mind getting in debt because rising house prices will cover me taking money out the bond". Oops.

The disconnect between rising debt and insolvencies has been marked in the last 4 years but with housing prices at a virtual standstill that trend will not continue.

Saturday Open Thread

Got anything you want to chat about or interesting stories/data to share? This thread is all yours.

Green Point: Rental Market Is Dead, Time To Sell

A few weeks ago we wrote about two apartments in Green Point which had been for rent since October. Well it seems like the rental market is still dead so the owner is now trying to sell them off. If you buy here's your ROI for the 1 bedroom apartment with asking price R1 205 000 and asking rent R5 800:

Down Payment	Monthly Payment	Cash flow	Annual Income	ROI
R0	R15423.97	R-9623.97	R-115487.68
R120500	R13881.58	R-8081.58	R-96978.91	-80.48%
R241000	R12339.18	R-6539.18	R-78470.14	-32.56%
R361500	R10796.78	R-4996.78	R-59961.37	-16.59%
R482000	R9254.38	R-3454.38	R-41452.61	-8.60%
R602500	R7711.99	R-1911.99	R-22943.84	-3.81%
R723000	R6169.59	R-369.59	R-4435.07	-0.61%
R843500	R4627.19	R1172.81	R14073.70	1.67%
R964000	R3084.79	R2715.21	R32582.46	3.38%
R1084500	R1542.40	R4257.60	R51091.23	4.71%
R1205000	R0.00	R5800.00	R69600.00	5.78%

And for the 2 bedroom apartment, asking price R1 250 000, asking rent R7 000:

Down Payment	Monthly Payment	Cash flow	Annual Income	ROI
R0	R15999.97	R-8999.97	R-107999.66
R125000	R14399.97	R-7399.97	R-88799.70	-71.04%
R250000	R12799.98	R-5799.98	R-69599.73	-27.84%
R375000	R11199.98	R-4199.98	R-50399.77	-13.44%
R500000	R9599.98	R-2599.98	R-31199.80	-6.24%
R625000	R7999.99	R-999.99	R-11999.83	-1.92%
R750000	R6399.99	R600.01	R7200.13	0.96%
R875000	R4799.99	R2200.01	R26400.10	3.02%
R1000000	R3199.99	R3800.01	R45600.07	4.56%
R1125000	R1600.00	R5400.00	R64800.03	5.76%
R1250000	R0.00	R7000.00	R84000.00	6.72%

Nothing really fantastic there. Both apartments require R700 000+ deposits just to break even. Those asking rents are also suspect because the flats were never rented out, so the actual rent attainable is probably less than what we have here.

Disa Park: Asking Prices Drop

Here's an add for four properties in Disa Park (I'm assuming specuvestor). All are reduced and willing to negotiate further:

BACHELOR/STUDIO/S R525.000 TO R590,00ALL OFFERS PRESENTED URGENT SALE
PRICED TO SELL NOW......... BEAT THE SEASONAL BUYERS RUSH.....HURRY
1 BEDROOM R900,000 REDUCED TO R795.000.NEG -AMAZING SEA/CITY VIEWS
2 BEDROM R1.25 MILL REDUCED TO R1.060. NEG -AMAZING SEA/CITY VIEWS.
3 BEDROOM R1.8 MILL REDUCED TO R1.600. NEG -AMAZING RENOVATION.

Just a note, he "seasonal buying rush" is almost over.

ABSA: Interest Rates Are Going Up

From the M&G: Absa says it expects another rate hike

The South African Reserve Bank (SARB) is expected to hike interest rates by a further 50 basis points at the end of January, Absa's economic research unit said on Wednesday.

This was in spite of retail trade sales data released earlier by Statistics South Africa showing that consumer spending continued to buckle.

According to the data released on Wednesday, retail trade sales at constant (2000) prices for November increased by 0,2% year-on-year compared with October's revised 1,9% (1,5%) increase.

This is the lowest level in 60 months, with the previous lowest being the 0% recorded in October 2002. The next worst was 0,7% in December 2002, but since then better numbers had been recorded until now.

However, in spite of this sharp drop in retail sales, Absa's economic research unit expected rates to rise.

First Sighting: Developers In Trouble

Here's a first sighting (at least for me) of a developer in trouble.

The Developer is incredibly anxious to sell due to credit problems and has put together the following awesome deal

- Double Storey 2 bedroom unit with bathroom.
- R20 000 deposit secures which is REFUNDED back to you on TRANSFER of unit.
- R12 000 REFUNDED back to you 7 days after transfer of unit and R5000 per month for 12 months
- Transfer Date: March 2008

Units will only be for sale until the end of November 2007 which is when the Developer will have to buy all outstanding units himself.

Well I'm looking at the calendar and it certainly is not November 2007 anymore. And all those cash back deals? Extremely shady to me.

Why not just take R72 000 (12 000 + R 5 000 * 12) off the price? Because then any commission related to the price of the property goes down. You'll be paying that R72 000 "discount" back via your bond at 14.5% which means in actual fact you'll be paying an extra R221 000 over 20 years (R 921 a month).

7.5 Million South Africans Will Lose Their Homes

Here's a bit of an alarming fact dropped nonchalantly in the article from Business Report - Repossessions escalate as debt skyrockets:

Car repossessions have risen by up to 20 percent year on year. But losing your 4x4 is nothing compared with the crunch when your home is repossessed. Remax has predicted that up to 17 percent of South Africans could lose their homes this year.

17 percent!!! Considering that their are an estimated 44 million South Africans, that means 7 480 000 South Africans will lose their homes in 2008.

If you consider that the current US mortgage crisis is estimated to cause 2 million households to go into foreclosure and that means about 7.2 million Americans (3.6 Americans per household). However the American population is around 200 million and so roughly 3.6% of the population is affected.

I really hope that 17% number is wrong. Very very wrong because if it's right there's a lot of pain coming.

Rent Vs. Buy: Muizenberg

Muizenberg is a suburb that went through a bit of a decline in the 90's but has been the target for a lot of redevelopment. Which I guess explains why rental returns are now so crap. Property prices have gone up a lot but rents have stayed down. Here's a one bedroomed loft going for R695 000 and renting for R3150.

Down Payment	Monthly Payment	Cash flow	Annual Income	ROI
R0	R8895.98	R-5745.98	R-68951.81
R69500	R8006.39	R-4856.39	R-58276.63	-83.85%
R139000	R7116.79	R-3966.79	R-47601.45	-34.25%
R208500	R6227.19	R-3077.19	R-36926.27	-17.71%
R278000	R5337.59	R-2187.59	R-26251.09	-9.44%
R347500	R4447.99	R-1297.99	R-15575.91	-4.48%
R417000	R3558.39	R-408.39	R-4900.73	-1.18%
R486500	R2668.80	R481.20	R5774.46	1.19%
R556000	R1779.20	R1370.80	R16449.64	2.96%
R625500	R889.60	R2260.40	R27124.82	4.34%
R695000	R0.00	R3150.00	R37800.00	5.44%

Break even with about R450 000 down and a max ROI of 5.44%, about 2% below inflation.

Rent Vs. Buy: City Bowl

Reader AL wrote to give us some anecdotal evidence abut the current whacky rent:price ratios. He rents a house in the city bowl for R7000 that was bought for R2 500 000, which admittedly is very good rental. Let's say the average interest rate has been 12% since the house was bought, then the ROI is:

Down Payment	Monthly Payment	Cash flow	Annual Income	ROI
R0	R27527.15	R-20527.15	R-246325.84
R250000	R24774.44	R-17774.44	R-213293.26	-85.32%
R500000	R22021.72	R-15021.72	R-180260.67	-36.05%
R750000	R19269.01	R-12269.01	R-147228.09	-19.63%
R1000000	R16516.29	R-9516.29	R-114195.50	-11.42%
R1250000	R13763.58	R-6763.58	R-81162.92	-6.49%
R1500000	R11010.86	R-4010.86	R-48130.34	-3.21%
R1750000	R8258.15	R-1258.15	R-15097.75	-0.86%
R2000000	R5505.43	R1494.57	R17934.83	0.90%
R2250000	R2752.72	R4247.28	R50967.42	2.27%
R2500000	R0.00	R7000.00	R84000.00	3.36%

Break even with R1 800 000 as a downpayment? 3.36% max ROI before maintenance and rates? That.... has got to be painful.

Sea Point: Asking Prices Drop

Asking prices are continuing to drop. In November we wrote about a flat that dropped it's price a whole R5 000 (a 0.3% price reduction). That obviously didn't work as the price is now reduced R245 000 (a 14% price reduction).

Century City: Asking Rents Drop

Here's more evidence that rentals are remaining flat or dropping. In February we wrote about a potential renter who looked at a 2 bed/2 bath apartment in Knightsbridge at Century City. The asking rent was R6 500 (down from R7 000) and the owner was getting "desperate".

Today the asking rent for a 2 bed/2 bath apartment in Knightsbridge is R5 500. That's a R1 000 drop in asking rent in under a year.

Rent Vs. Buy: Hout Bay

Usually one would expect a bachelor flat to have a decent rental returns.
Here's a ground floor bachelor in Hout Bay, selling for R695 000 with a rental of R3 000/month. Here's the ROI before rates, maintenance and vacancy costs are taken out:

Down Payment	Monthly Payment	Cash flow	Annual Income	ROI
R0	R8895.98	R-5895.98	R-70751.81
R69500	R8006.39	R-5006.39	R-60076.63	-86.44%
R139000	R7116.79	R-4116.79	R-49401.45	-35.54%
R208500	R6227.19	R-3227.19	R-38726.27	-18.57%
R278000	R5337.59	R-2337.59	R-28051.09	-10.09%
R347500	R4447.99	R-1447.99	R-17375.91	-5.00%
R417000	R3558.39	R-558.39	R-6700.73	-1.61%
R486500	R2668.80	R331.20	R3974.46	0.82%
R556000	R1779.20	R1220.80	R14649.64	2.63%
R625500	R889.60	R2110.40	R25324.82	4.05%
R695000	R0.00	R3000.00	R36000.00	5.18%

You need to put over 50% downpayment to break even and buying the place for cash gets you a 5.18% annual ROI. Which is less than inflation. Take out the various ownership costs and the return is even worse.

Green Point: Rental Market Is Not Moving

If you're a buy-to-let investor, having an empty unit is the kiss of death. It can wipe out years of returns and quickly turn that 7% ROI into negative numbers. But that's not the case in Cape Town because rental property is in high demand right? Well tell it to this specuvestor who has two rental flats (one, two) in Green Point sitting empty for the last 3 months. And while the are expensive - R5 800 for a 1 bed, R7 000 for a 2 bed - I have seen worse.

If It Won't Sell For R780 000 I'm Sure It Will For R800 000

This apartment in Century City used to be for sale for R799 000, then dropped to R780 000 and is now back up to R800 000. Hey it's a new year why not bump the price back up despite being on the market for over 5 months.

I'll bet that this is another case of a specuvestor continuing to lose money every month to cover bond payments (the place has a horrendous 2.2% ROI if you pay in cash) who has to raise the price every few months to cover these losses.