FNB: Expect "National House Price Deflation"

John Loos is FNB's property strategist and has been one of the biggest rah-rah property cheerleaders during the bubble run up over the past few years. When there were signs that property market was overvalued Loos was first in line to reassure us that everything was alright and property always goes up. Well according to this report in MoneyWeb ol' Johnny is a bit less optimistic these days

FNB's property strategist John Loos, who is known for his general optimism about South African real estate, is bracing himself for "some national house price deflation"

Producer Inflation Worsens To 12.4%

Producer Price Inflation (PPI) has worsened to 12.4%. It was expected to be 11.7%.

Producer price inflation (PPI) rose to 12.4 percent year on year in April, from March’s 11.9 percent rise according to Statistics South Africa.

The PPI rose 2.1% on a monthly basis after March’s monthly increase of 2.0%.

PPI was expected to be at 11.7% year-on-year, a survey by I-Net Bridge has found. Forecasts ranged widely from 11.0% year-on-year to 13.1% year-on-year.

Tito's looking at that big red button again...

Rent Vs Buy: Tokai - Cute Cottage, Crap Investment

Here's a 2 bedroomed cottage in Tokai on the market for R795 000 and currently tenanted at R3 800 a month. With a 100% bond the difference between the monthly bond payment (R10 468) and the rent is R6 668 a month, 1.75 X the rent. Here's the payment and yield graph:

So buying the place in cash gets you a 5.75% ROI, 5% below inflation. A 63% downpayment is required to break even on cash flow and even with a 50% downpayment 2.16% capital appreciation is required to not lose any money at all.

TITO GOES NUCLEAR! 2% RATE HIKE IN DISCUSSION!

Tito's hand is hovering over the big red nuke button at the Reserve Bank:

A huge interest rate shock awaits South Africans as the monetary authorities consider hiking rates by another 200 basis points.

Most economists have predicted rates only to increase - at most - by 100 basis points.

But South African Reserve Bank governor Tito Mboweni said on Wednesday that he and his colleagues had discussed the impact on the economy of raising the bank's official repo rate by 200 basis points.

Hiking rates 2% is going to take some cajones!

CPIX Continues To Climb

Consumer price inflation continues to climb. Business Day reports:

THE INCREASE in SA’s consumer price index excluding mortgage rate changes (CPIX) for metro and other areas, which is used by the South African Reserve Bank (SARB) for its inflation target, was up 10,4% year-on-year (y/y) in April from 10,1% y/y in March, Statistics South Africa (Stats SA) said today.
CPIX was up 1,6% month-on-month (m/m) after it increased 1.6% m/m in March. This is the thirteenth month running that CPIX has been above the 6% upper target limit.

Headline consumer prices - the 12-month rate of change in the consumer price index (CPI) for metropolitan areas - was up 11,1% y/y in April from a 10,6% y/y increase in March.

The core inflation rate, which excludes volatile foods, municipal rates and monetary policy changes, was up 10,2% y/y in April from 9,8% y/y in March.

A 50 base point rate hike is guaranteed now and the odds for further hikes after that are rising

Rent Vs Buy: Parklands - Lose Your Money And Your Mind

Here's a 2 bed duplex in Parklands (aka The Suburb That Destroys Souls) on the market for R689 000 which is tenanted at R3 300 a month. With a 100% bond the difference between the bond and the rent is 1.75 times the rent itself. Here's the yield and payment graph.




5.75% return on investment if you buy it in cash, which means you're only losing 5% (and rising) of your investment due to inflation every year. To break even on cash flow requires a 63% downpayment and even with a 50% downpayment you still require 2.15% capital appreciation to not lose any money. And that's before rates, levies, maintenance and vacancy so expect even worse returns

R4.5 Million To R2.5 Million

From the comments on our recent guest post The Real Cost Of Credit:

Regarding house prices dropping, I have been tracking a house in the Southern Suburbs of Cape Town originally listed at R4.5M, then dropped to R3.8M and now the agent is saying that the seller is very desperate due to having bought a second house and struggling to service two bonds ie possibly available at R2.5M?

Emergency Rate Hike On The Way!

Consumer Price Inflation Index numbers are going to be released next week and the growing concensus seems to be it's going to be pretty bad. Bad enough for an emergency rate hike:

Chief economist of Dynamic Wealth, professor Chris Harmse, says he will not be surprised if an emergency Monetary Policy Committee (MPC) meeting is called on Wednesday afternoon next week after CPIX inflation has been announced at worse-than-expected levels.

April CPI data is due for release at 11:30 on Wednesday and comes hot on the heels of a statement made recently by central bank governor Tito Mboweni that rates should go up again.

Prior to that talk it was inferred from an SABC interview with Mboweni that an emergency meeting may be on the cards as inflation was getting out of control.

Rent Vs Buy: Tyger Waterfront - "Great Investment" If You Defined Great As 6% Below Inflation

Following on from our previous post, the same seller is also selling this 1 bedroomed apartment also somewhere on the Tyger Waterfront for R680 000. This one is tenanted at R3 300 a month with rates and levies costing R1 020. That means rates and levies are eating almosta third of your monthly rental income, leaving a net rental income of R2 280 a month. Taking out a 100% bond means that the difference between the monthly bond payment (R8 954) and the net rental income is R6 674, 2.9 times the monthly rental income itself. That's approaching De Waterkant numbers! Here's the payment and yield graph:

This has worse numbers than the previous apartment. If you buy in cash you can look forward to a return on investment of a hair's breadth over 4%, as opposed to leaving your money in the bank where you can get anywhere from 9%-11%. Putting down 50% still requires 3.88% capital appreciation to not lose any money at all and to break even on cashflow requires a 74.5% downpayment (over a half a million rand). Rates and levies are taken into account but vacancy and maintenance are not. 4% a year ROI? I'll take two!!

Rent Vs Buy: Tyger Waterfront - "Buy a life style" because you aren't buying an investment

This 2 bed apartment in the Tyger Waterfront is on sale for R890 000 and has a "possible" rental of R4 000 a month (ie you might be getting less). Take away rates and levies of R687 and R234 a month and your net rental income is R3 077 a month, which means that the difference between the monthly bond payment (R11 719 a month) and the net rental is R8 642, which is nearly 2.8 times greater than the net rental itself! Here's the payment and yield graph:




So buying this "life style" will give you a 4.15% return on investment, nearly 6% below inflation. To break even on cashflow you need a whopping 73% downpayment (R656 325) and putting down 50% as a deposit still requires 3.15% capital appreciation to not lose any money at all! Rates and levies are taken into account but vacancy and maintenance are not.

The Real Cost Of Credit

The following is a guest post from reader BP

The Real Cost Of Credit

The real cost of credit needs to take into account earnings notably the after tax or disposable income. Interest rates are one thing - the level of indebtness is another! Current levels of debt to disposable income are about 80% - it used to be about 52% until about 3 years ago when it suddenly took off. Such easy credit fueled the property run. Property was never "cheap" in the first place - easy credit pushed it to dizzying heights. At the same time from mid-2003, we had an equity bull market. By all means the residential property market outpaced it - in cape town it did. Where would that be a normal occurence? It is an incredible exception - not to be repeated for a very long time.

As interest rates respond to inflation that is grinding down peoples spending power and hurting the poor, people are crying about high interest rates. Did they never conceive that interest rates could increase from multi-decade lows? Or was it different this time - as told by the knowledgeable estate agents! And inflation will rise further as will prime. bets are on for a definite 50 points next month and a 60% chance of another 50 points in August! Prime at 16%. Not too high?

Consider the following 2 useful indicators:

1) The cost of debt-servicing as a percentage of Income. Current debt to disposable income is 80% and interest rates are 15% (15.55 next month). that means that the real cost of servicing is the product of these 2 or 12% (12.4% next month). Not too high? Consider the crisis of 1998 - debt to disposable income was 52% and prime hit 25.5% making the cost of servicing 13.26%. sure it only stayed there for a short time but it did d damage. We are currently not too far off that now. Prime at 16.5% equates to this punitive figure (16.5% * 80% approximates 25.5% *52%). BUT even so it is not only the level that counts but how high it stays up there! In effect, looking at a graph, it is not the curve that is important but the area under it (the integration of the curve for the mathematically minded). And with inflation set to rise further bet on it staying up there longer.

2) The penalty for borrowing money is actually the real cost of a loan, simply the difference between inflation and the prime rate. Currently it is 4.4% (15% - 10.6%) which by historical standards is really low - the average over the last 15 years is about 7%. so another 1.5% - 2% increase in prime is not impossible to equate to the average.

These two indicators indicate one thing: interest rates will increase in the near term and will rise further before they can be considered as "punitive".

A last comment on inflation. With commodity prices staying high (as per the CRB index of overall commodities), inflation has to feed through. It has already started in food and fuel. Wait for cars, clothing, furniture, and so on. and even though the economy stagnates, if inflation is rising the Reserve Bank HAS to raise rates. In the past, this is what Central banks have done. Such "stagflation" (economic stagnation and inflation rising) portent very hard times. Remember the "sour 70's" where a series of crises and market reversals ruined fixed asset values. They can easily arise again. My view is that they are which is why all my money is in cash products.

Business Report: Property industry faces tougher times

Property industry faces tougher times

The sharp slowdown in residential property sales volumes is leading to estate agents leaving the industry, and industry players expect things to get worse this year.

Steve van Wyk, the principal of Seeff Properties office in Centurion, said last week his office now had 42 agents, compared with 53 a year ago.

It's estimated the number of estate agents in South Africa could more than halve in number, going from 77 000 - 80 000 at it's peak to 36 000.

Rent Vs Buy: Cape Town CBD

This apartment in Strand Street in the CBD is for sale for a cool R1 million and is tenanted (till the end of May) for R3 800 a month. That means with a 100% bond the difference between the monthly bond payment (R13 167) and the rent is R9 367 a month, nearly 2.5 times the rental itself! Here's the payment and yield graph:

Ouch! Buying the place in cash gets you a 4.56% annual return on investment, about 5% less than just leaving your money in the bank. Just to break even on cashflow you need a massive 71% downpayment! Even putting down 50% of the purchase price requires over 3% capital appreciation just to not lose any money at all! And this is before costs such as rates, levies, maintenance and vacancy are taken into account.

Rent Vs Buy: Hout Bay - Invest 3.8 Million And Make No Money

This isn't a proper rent vs buy because I would never advocate someone to rent a 3 bedroomed townhouse for R28 500 a month. That being said it's a helluva lot better than paying R79 000 a month to cover the bond on the R6 000 000 asking price. If you were stupid enough to buy this place with a 100% bond then you'd be losing R50 000 every month trying to cover the shortfall! Here's the payment and yield graph:

So if you paid the whopping R6 000 000 asking price you'd end up with a 5.7% return on investment, probably 5% less than the rate of inflation in South Africa. Just to break even on cash flow you need a massive deposit of R3.8 million! I repeat: to make no money at all you need to put down nearly four million Rand. If you had say put that R3.8 million in a money market account paying 10% you'd at least be making R380 000 a year. Even with a 50% deposit you still require 2.2% capital appreciation to not lose any money at all.

And of course there's the fact that we have not taken into account rates (about to go up), levies (which will be considerable for a security estate in Hout Bay) maintenance and vacancy.

Rent Vs Buy: Gardens - "be hip and not square" and lose R60 000

Here's a one bedroomed apartment in Gardens on sale for R1 100 000. How much rent does it pull in? R4 000 a month. With a 100% bond your monthly repayments will be R14 484, which means that the difference between the bond repayments and the rent (R10 484) is over 2.5 times more than the rental income itself! Here's the payment and yield graph:





Paying for it in cash gets you a retun on investment of 4.36%, only 6% less than inflation. You need a 72% downpayment (R800 000) to break even on cash flow and even if you put down a 50% downpayment you still need 3.54% capital appreciation not to lose any money at all. Considering that the tenant is in till December and prices are not moving, if you bought today then you'll have lost R60 000 by then.

Reserve Bank: Inflations Going To Get Worse - Prepare For More Rate Hikes

SARB: Inflation outlook deteriorates

The South African Reserve Bank said on Tuesday inflation was expected to rise, but that it remained committed to bringing the gauge within target range "over a reasonable time horizon".

The targeted CPIX consumer inflation gauge has persisted above the top end of a 3% to 6% range since April 2007, and accelerated to a new five-year high of 10,1% year-on-year in March.

"The inflation outlook has deteriorated since the publication of the previous monetary policy review in November 2007," the central bank said in a twice-yearly monetary policy review.

Developers In Trouble And How To Lose R94 000 Without Trying

Here's an ad from a developer who seems to be in some trouble, selling some houses in the Strand for R435 000:

Brand new three bedroom homes with a single garage and garden, situated two blocks from the beach, in strand !!!
REDUCED FROM R529 000.
The builder has 3 houses that he needs to sell fast!

This is in a complex of seven houses so there are three houses still available. Which means that if the four existing owners bought at R529 000 they just took a R94 000 haircut and as interest rates increase they will be paying more and more for an asset declining in value. Should any of those owners decide they wish to sell they'll be competing against the developer who can afford to cut prices further.

Selling owners versus developers is going to become a more common occurrence. Developments like The Rockwell (a personal favourite of ours) still has as of 30 April 2008 twenty units for sale direct from the developer, that is when they aren't trying to rent them out. Who do you think has more room to negotiate prices? The developer or people trying to resale their "investment" apartment?

Rent Vs Buy: Stellenbosch

Here's a 3 bed house in a security complex in Stellenbosch on the market for R1 395 000 and which is currently rented out till November for R6 000 a month. With a 100% bond the monthly bond repayment will be R17 974 a month nearly R12 000 a month more than the going rent. Here's the payment and yield graph:



Buying in cash gets you a return on investment of 5.27% with 2.63% capital appreciation required just to not lose any money. Cash flow breaks even with a 66% downpayment, nearly R900 000! And these figures are overstated as rates, levies, maintenance and vacancy have not been taken into account.

Rent Vs Buy: Green Point - Since When Is 5% Yield A Selling Point?

This apartment in Green Point is on sale for R1 895 000 (and on auction soon afterwards) with a tenant in till March 2009 paying R8 500 a month. I love how the ad puts 5% yield right in the ad title, as if a return on investment 5% below inflation is a good thing. With a 100% bond the difference between the rent and the bond payments is just under twice the rental itself. Here's the payment and yield graph:


5.38% ROI when you buy in cash with 2.52% capital appreciation required with 50% down not to lose any money at all. To be cash flow positive you need to put down a whopping R1 250 000 (65%). Not exactly a "great investment/great buy" is it?

Rent Vs Buy: Blouberg - "Expected" excellent buy

Here's a (by the looks of it) newly completed 2 bedroom apartment in Blouberg on sale for R1 095 000 with an "expected" gross rental of R5 000 a month. With a 100% bond the difference between the bond payments and the rent is almost double the rental itself. Here's the payment and yield graph:






So less than 5.5% return on investment if you pay in cash and 65% downpayment required to break even on cash flow. Even with a 50% downpayment (over R500 000) you still need close to 2.5% capital appreciation required not to lose any money.