Rent Vs Buy: City Bowl

Here's a 2 bed victorian cottage in the City Bowl on sale for R1 350 000 which will attain a rent from R6 600 from June, so I estimate it gets about R6 000 now. With a full bond the difference between the rent and the bond payment is a touch under double the rental alone. Here's the income and yield graph:

All in all pretty bad. Sub 6% return on investment with 62% downpayment required to break even on cash flow. With a 50% downpayment you still need 2% capital appreciation to not lose any money at all.

Inflation Breaks 10%

CPIX at double digits as era of low inflation ends

INFLATION rocketed by more than 10% last month, scaling a new five-year peak that was well above expectations and encouraging speculation the Reserve Bank will raise interest rates at its next policy meeting in June.
The annual rise in CPIX, SA’s main inflation gauge, speeded up to 10,1% from 9,4% in February — its highest since December 2002, data from Statistics SA showed yesterday.

The next rate hike is guaranteed. I suspect the odds for two more after that are greatly increased.

Three More Rate Hikes Before The End Of The Year?

It is possible.

There is a 70% chance of another 50 basis points interest rate adjustment, taking prime to 15.5%, and an even chance of two additional hikes before year-end, according to senior economist from Credit Guarantee Insurance Corporation, Luke Doig.

"Most confidence surveys paint a bleak picture, while expectations don't indicate any imminent recovery," he says.

Rent Vs Buy: Rosebank

This "cute" victorian cottage in Rosebank is on sale for R849 000 with a gross rental of R4 000 a month. With a 100% bond the difference between the rent and the bond payments is just under twice the cost of the rent itself. Here's the payment and yield graph.

Paying for it in cash gives you a 5.65% return on investment, with 64% required just to break even on cash flow. Even with a 50% downpayment you need 2.25% capital appreciation just to not lose any money. The actual returns will be lower once levies, rates, maintenance and vacancy costs are taken into account. But you do "save" R17 000 because the transfer duty is included in the price, which is barely 2 1/2 months shortfall if you buy it with no money down.

The Estate Agent Cull Begins

Waaaay back in September 2006 we linked to a story that indicated that were double as many agents in SA as there needs to be. Despite having 77 000 - 80 000 Neville McIntyre, chief executive of Jigsaw Holdings (which includes estate agencies Aida and Realty) said the market can only really support 36 000.

Today in Business Day Herschel Jawitz, CE of Jawitz Properties states he believes there will only be a decline in about 10 000 - 15 000 agents. However Lew Geffen of Sotheby's International Realty repeated Neville McIntyre's conclusion:

I think by year end there will only be about 36000 estate agents

Investors Exit The Market

I think we'll start seeing a lot more ads like this one. Here's an ad from an investor unloading his entire portfolio of 18 properties all over the Cape ("Noordhoek to Grabouw") for R7 000 000. The properties have a "potential rental" of R46 000 a month, which either means they are currently renting for less than that or some properties are sitting vacant. According to my calculations if you achieve that "potential rental" and you want to be cash flow positive you'll need to put down at least R3 500 000. It must be a great feeling 'investing' R3 500 000 and not actually making any money. I also doubt that R46 000 rental includes rates, levies and other ownership costs.

This 2 bed apartments in Noordhoek seems to be one of the apartments they're trying to sell off. It's for sale for R615 000 and has a gross rental of R3 000. Here's the yield and payment graph.

Paying in cash yields a 5.85% return on investment, with a 63% downpayment needed to break even on cash flow. Just to not lose any money at all with a 50% downpayment requires just over 2% capital appreciation. Again this is before rates, levies, maintenance and vacancy costs.

Rent Vs Buy: Observatory - "Excellent Investments" Yield 3% Below Inflation?

Here's an "excellent investment" bachelor pad in Observatory on the market for R570 000 with a rental of R2 800. With a full bond the difference between the rent and the monthly payments is just
over 1.5 times the rent itself. Here's the yield and payment graph:

Before rates, levies, maintenance and vacancy costs are taken into account purchasing the place for cash gets you a mere 5.89% about 3% below official inflation numbers. A 62% downpayment is required to break even on cash flow and even with 50% downpayment 2% capital appreciation is required to not lose any money at all.

Rent Vs Buy: Gardens - With New Interest Rates

Here's the first Rent Vs Buy using the new prime interest rates at 15%. We have a 41m^2 one bed apartment in Gardens for sale for R675 000 with a net rental of R2 426 per month (R3 500 gross - R1 074 in rates and levies, ouch!). That means with a full bond the difference between the net rental and the monthly payment is 2.6 times the rent itself! Here's the yield and payment graph:

Buying for cash gets you a 4.31% return on investment with a 72.7% downpayment required to break even on cash flow. Putting down a 50% downpayment requires 3.59% capital appreciation just to not lose any money at all.

More Rate Hikes To Come

Rate hikes: Expect more

After what we heard today, I am still expecting another rate hike in June or August, given the way Mboweni was talking how the Bank has reacted to the electricity price increases, and how we can see inflation into double digits.

I won't be surprised to see another hike in June.

Reserve Bank Hikes Repo Rate 50 Points

Mboweni hikes rates as inflation risks remain

The South African Reserve Bank's (Sarb) Monetary Policy Committee (MPC) ended its two-day meeting on Thursday by announcing it would hike the repo rate by 50 basis points, bringing the rate at which it lends to banks to 11.5 percent.

In line with new policy, the repo decision was announced first as opposed to at the end of the statement.

Commercial banks prime overdraft rates will almost certainly rise by 0.5 percent to 15 percent from the current 14.5 percent.

I think we might see further rates hikes this year.

Agents Start To Panic: Round 2 - Observatory

The amount of inventory sitting on agents books must be piling up because I received the following email detailing agents putting pressure on sellers to lower prices in Observatory, which ironically enough is supposed to already be one of the more affordable areas in Cape Town:

During the past week, we contacted all the owners of property on the market in Observatory and asked them to reduce their asking prices in an attempt to make house prices more affordable. Below is the result of our efforts:

87 ARNOLD STREET: REDUCED FROM R780 000 TO R750 000. An immaculate lock-up-and-go property with low maintanace. Two huge bedrooms with built-in cupboards here, an open plan lounge that overlooks the back garden, a fitted kitchen and pleasant bathroom.

17 IRWELL STREET: REDUCED FROM R845 000 TO R795 000. Two bedrooms, two bathrooms and an outside room with a w/c and basin in this sunny home in a tree-lined street.

6 ROBINS ROAD: REDUCED FROM R915 000 TO R865 000. Modernized Victorian home in excellent condition. Two bedrooms with open plan living between the kitchen, lounge and private courtyard.

31 LOWER COLLINGWOOD ROAD: REDUCED FROM R1 100 000 TO R995 000. Freestanding home with three bedrooms, two bathrooms, a study and large garden. Secure parking too, in a quiet position close to the greenbelt area by the Liesbeek River.

22b. ASH STREET: REDUCED FROM R1 150 000 TO R1 100 000. Most unusual home with two bedrooms and a big and private garden and a separate self-contained wooden house hiding in one corner of the property. Secure parking too.

The largest drop was 9.5% (from R1 100 000 to R995 000) the smallest 3.8% (R780 000 to R750 000).

Rent Vs Buy: City Bowl - An Albatross For Years To Come

Here's a 2 bedroomed apartment in the City Bowl on the market for R1 195 000 with a rental of R5200 a month and tenanted till December 2008. Described as a "Good investment for years to come." The difference between the rent and the bond payment is just under twice the rental. Here's the yield and payment graph.
Sub 6% returns if you buy it for cash witha 66% downpayment required to break even on cash flow and 2.46% capital appreciation required even if you put down a 50% deposit and of course these numbers will be lower once rates, maintenance and vacancy costs are taken into account. But hey you've got a tenant locked in till December! The sucker!

Rent Vs Buy: Hermanus - Let's Be Realistic

Here's a house in Hermanus on sale for R1 800 000. It rents for R5 000 and has a cottage on the property that produces another R2 500 a month in rent for a grand total of R7 500 a month in rent. The house was previously listed for R1 990 000 but the seller chopped R190 000 (almost 10%) off the price to 'be realistic'. That being said if you took out a full bond the difference between the rent and the bond is double the rental itself. Here's the income yield and payment graph.
So paying for the place in cash gets you a dismal 5% return on investment (about half current inflation). You're cash flow positive with 67% downpayment (well over R1 million) and even with a 50% downpayment you need 2.68% capital appreciation to not lose any money at all. And once again that's before rates, maintenance (which will be considerable on a property this size) and vacancy costs.

Going Up And Coming Down Aren't Equal

I've often heard people make the comments that "if property prices drop 20% it doesn't matter because they've appreciated 40% so I still have 20% appreciation". That assumption is incorrect. For example let's say your house had a starting price of R1 000 000 and a appreciated 40% to R1 400 000. A 20% depreciation will reduce the price to R1 120 000, not R1 200 000, which is only a 12% appreciation. The following graph illustrates this:
The green line is what people expect to happen - x appreciates by 20% and then depreciates by 20% to come back to x - the red line is what actually is required - x appreciates by 20% and then only has to depreciate by 16% to go back to x.

So when Standard Bank says that the median price has depreciated 5%, this means that in fact that 5.25% of appreciation is wiped out. Larger drops wipe out even more - 10% depreciation wipes out 11% appreciation, 20% depreciation wipes out 25% appreciation and 30% depreciation wipes out 42% appreciation.

Estate Agents Start To Panic

The 70 000 estate agents in SA (about 30 000 too many) are starting to panic as the property market in SA goes over a cliff. Sellers have become accustomed to high prices but as the market deteriorates agents who are desperate to make a commission (for some their only commission of the year so far) are urging them to consider every offer. From RealEstateWeb:

Reject today's offer at your peril - agents

Greedy, stubborn sellers will regret holding out for a higher price. That's the message from a number of estate agency bosses, as residential market volumes drop off dramatically.

The latest to issue such a warning is Lew Geffen, chairman of Sotheby's International Realty SA, who believes the residential property market is much worse than recent figures from Absa suggest.

Geffen goes on to say that last year's prices are now unobtainable. With every bank predicting further weakening in the market how long before Geffen starts begging sellers to forget about 2006 prices? And then 2005 prices?

Rent Vs Buy: Belville - The Low End Doesn't Produce High Yields

Bank economists and real estate agents continue to claim that despite the slowdown in the market the low end of the market is where all the money is being made. Here's a 2 bed flat in Belville, an 'Excellent investment' on sale for R580 000 which rents for R2 800 a month. With a 100% bond the difference between the rent and the bond (R4623) is about 1.65 times the rent, which while not great is one of the better numbers we've seen. Here's the yield and payment graph:



A 5.79% max return on investment, and that's before rates, maintenance and vacancy costs, isn't great. With a 50% downpayment you need 1.9% capital appreciation to not lose any money and break even on cash flow is at 62% downpayment.

Rent Vs Buy: Cape Town CBD X 2

Here are two apartments for sale in the city bowl I noticed. The first is 41m^2 one bed apartment in Gardens on sale for R675 000. It has a net rental of R2 600 (R3 500 minus R900 in rates and levies) which means that the difference between the bond payment and the rent is more than twice the rental itself. Here's the yield and payment graph:

Paying in cash you get a pitiful 4.62% return on investment. To break even on cash flow requires a 70% downpayment and with a 50% downpayment the capital appreciation needs to be just over 3% to prevent you losing money.

The second property isn't much better. It's a 42m^2 one bed on sale at the Four Seasons (a specuvestor favourite) for a whopping R829 000 (that's about R20 000/m^2!) with a net rental of R3 300 (R4 000 minus R700 in levies). Here's it's yield and payment graph:

A 4.8% return on investment if you pay in cash, which is about half the inflation rate. Break even on cash flow with a 70% downpayment and 2.9% capital appreciation required to not lose any money even with a 50% downpayment.

Rent Vs Buy: Muizenberg - Potential For Low Yields

We're on a bit of a Muizenberg kick today. Here's a 1 bed apartment for sale for R900 000 with a 'rental income potential' of R3 500 a month. The difference between the rent and the bond payment is over two times the rent itself if you took out a full bond. Here's the income yield and payment graph:

So if you buy the place in cash you can expect a 4.67% return on income, about 5% below inflation. With a 50% downpayment the property still has to appreciate 3% to prevent you from losing money and breaking even on cash flow is only possible with a 70% downpayment. Yields would be even less if you took into account rates, levies, maintenance and vacancy costs.

Rent Vs Buy: Muizenberg - 15% Is In The Bag

Here's a 1 bed(?) apartment in Muizenberg is on sale for R795 000 and 'may command a rental upwards of R3 000' (or it may not). Levies are R630/month bringing the net rental to R2 370. Which means that on a 100% bond the difference between the rent and the bond is 3.3 times the bond itself. That means some horrible rental yields but never fear because according to the ad it has an '...estimated growth rate 10-15% pa'. I guess someone hasn't been paying attention to the news? Here's the payment and yield graphs:



So if you pay in cash you van expect a 3.58% return on investment. With a 50% downpayment the property has to appreciate by 4.4% just to not lose any money at all. a 76% downpayment is require d to break even on cashflow.

Muizenberg: Villa D'Algarve Is Full Of Specuvestors

Villa D'Algarve is a recently completed development in Muizenberg and, as expected in a new development, it's full of specuvestors trying to sell the properties they bought off plan and had no intention of ever living in. Here's three recent ones I found on Gumtree:

• 3 Bed Unit - R835 000


• 2 X 3 Bed Unit - R795 000/R849 000 (Most hilarious part of the ad, the title "My Beautiful Lady. I will miss you". Like they ever spent an actual night there!)


• 3 Bed Unit - R865 000

Rent Vs Buy: Cape Town CBD - What You Lose In Rent You'll Save In Petrol

Here's an apartment in the Cape Town CBD on sale for a cool R1 000 000. I'm not sure how many bedrooms it has but when you consider it rents for R3 800 a month I guess it only has one. If you took out a 100% bond the difference between the rent and the monthly bond repayment is 2.36 times the rent itself. Here's the yield and payment graph (RIP Tables. You served us well but we're moving into the 21st century here and the future is visual!)


So a 70% downpayment is required to break even on cashflow, and with a 50% downpayment you still need 3.12% capital appreciation to not lose any money at all. If you do plonk down a bar to buy the place outright you can look forward to a 4.56% annual return on investment. That's only 4% below inflation (well the official numbers at least). And of course there's the tiny fact that this excludes rates, levies, maintenance and vacancy costs.

Property Prices Drop

Folks. This ain't no April fool. It's official. Moneyweb reports that South African house prices fell for the first time in 8 years. According to Standard Bank house price growth -5.2% from March last year.