Open Thread: Inflation

What do you think inflation will peak at? Some economists believe it will go as high as 13%. Do you think the Reserve Bank will be able to bring it under control? What other measures besides inflation targeting could be used?

Producer Price Inflation Hits 16.4%

Well that break didn't last long did it? Anyway it seems that producer price inflation just hit 16.4% which was way outside of any economists predictions. Another rate hike (or two) are a lock in.

And this is the last post till 25th July... Promise.

Mid Year Break

It's time for the annual July mid year break here at Cape Town Property Bubble HQ. We'll be back on the 25th of July. Consider this an open thread so if you have any interesting stories post them in the comments below.

CPIX Up Again - Expect Another Rate Hike

The Consumer Price Inflation Index is up again, further strengthening the chaces of another repo rate hike by the Reserve Bank

CPIX up 10.9 percent

SA’s consumer price index excluding mortgage rate changes (CPIX) for metro and other areas rose by 10.9% year-on-year in May, from the 10.4% year-on-year increase registered in April, according to Statistics South Africa.

CPIX was up 1.1% month-on-month after it increased 1.6% month-on-month in April.

This is the fourteenth month running that CPIX has been above the 6% upper target limit.

When The Second Auction Fails...

After two failed auctions perhaps the R3.6 million asking price on this Simon's Town McMansion, which I assume is the reserve price at the auctions, might be a bit high. I remember when ads proclaimed this place as having a 'market value' of R7.5 million and the asking price was R4.5 million. Now it's 'market value' is not even R3.6 million. It's still listed for R3.95 million at the realtor's site.

REMAX Inventory Report

Reader Bean Counter sends in a report on the inventory at REMAX every now and then. Here he is for June:

Crunched the numbers on the Remax site, and once again a big jump since last month: 309 more properties on the market, taking the total number for the Cape metro area to 5,578.

To refresh your memory, when I first did a stock-take in August last year, that number was 2,842.

Specific hotspots where sharp increases in unsold stock happened this month where:

Hout Bay - 69% (small numbers, from 13 to 22, but still significant)
Bloubergrand - 18.8%
Milnerton - 18.7%
Somerset West - 14%
Sea Point - 8.6%

The northern suburbs and False Bay coast are still damming up like mad - that's where the dam wall is going to crack first - but I think it's also very significant that Hout Bay and Sea Point are starting to pile up too. That's expensive real estate, which is further evidence that the crash is starting to hit wealthier owners and investors.

Still, though, there's almost no price reduction happening from Remax clients, so obviously the denial is still strong - probably being fueled by estate agents who refuse to accept that the boom is over.

Rent Vs Buy: Gardens - Excellent Views, Not So Excellent Yields

This 24m^2 bachelor flat in Gardens is on the market for R539 000 and has a gross rental income for R2 800. With a 100% bond you'd be paying in an extra R4 497 a month just to cover the R7 297 bond payments, the difference of R4 497 being 1.6 times the rental income. Here's the payment and yield graph.








So a 6.23% ROI if you buy in cash, about 4.5% below inflation. With a 50% deposit 1.89% capital appreciation is required to not lose any money and to break even on cash flow requires a 61% downpayment( over R330 000).

Rent Vs Buy: Mutual Heights - The Worst Investment In Cape Town

Back in March we showcased this 2 bedroomed apartment in Mutual Heights in the Cape Town CBD which was on the market for R2 395 000 and had a rental income of R6 000 a month, meaning that if you bought the place in cash you'd be making 2% return on investment, only 8.5% below inflation. Sensing the turmoil in the property market the agents have dropped the price to R2 350 000, a massive 1.8% price drop! Needless to say it's still on sale. One thing I forgot in the previous analysis was to include the rates and taxes of R636 a month, so what I thought was R4 200 in net rental income is in fact only R3 567. We also need to take into account the increase in interest rates. There mere fact that the rent and selling price are so out of whack should have you running for the door of the estate agency already.

If you bought this place with a 100% bond, the difference between the bond payment (R31 816 a month) and the net rental is R28 249 a month, 7.9 times the net rental! Ouch! For shits and giggles here's the payment and yield graph:

Sweet lord that is ABYSMAL. Paying for the entire purchase in cash will get you a whopping 1.82% return on income, which is only about 9% below inflation. To break even on cash flow requires a huge 88% downpayment, over R2 million!!! Putting down a 50% downpayment requires a 6.3% capital appreciation to not lose any money.

If you buy this place as an "investment" you might as well take your money, put it in a pile, pour petrol over it and set it on fire. This is the worst investment I've ever seen in Cape Town.

Rent Vs Buy: Parklands - R820 000 Investment = 0% ROI

Here's a 3 bed duplex apartment in Parklands on the market for R1 185 000. This unit has a tenant paying R4 900 a month in rent, which means that with a 100% bond the monthly bond payment is R14 900 a month and so the difference between the bond and the rent is R11 143 a month, 2.3 times the rent itself! Here's the payment and yield graph:

So buying the place in cash gets you a 4.96 return on investment, almost 6% below inflation. To break even on cash flow (that is to have a return on investment of 0%) requires over R820 000 downpayment. With a 50% downpayment you still need 3.16% capital appreciation to not lose any money at all! And once other costs are factored in - rates, levies, maintenance and vacancy - the returns will be even worse.

Buy My House And Let Me Rent From You

Here's an ad for a house in Oakdale on the market for R800 000. The ad lists that a tenant is available and it turns out the tenant is in fact the owner who is willing to rent at R4 000 a month. I guess the owner did the math and realised that paying R10 831 a month for a 100% bond on a depreciating asset is stupid when you could be saving close to R84 000 a year by renting. We've seen this happen before.

If you did buy the place and took the previous owner on as a tenant with the offered rent you'd be making 6% ROI, only 4.5% below inflation.

Someone's Getting Screwed And It Ain't The Tenant

This 2 bed apartment for sale doesn't have anything special about it except for this little note at the bottom:

Tenanted till Nov 2012.

November 2012? That's over four years away! Now if any tenant with half a brain signs a lease agreement that long then I sure hope that they got a decent rent discount,wrote into the lease agreement a rental escalation clause that is below inflation and some serious concessions (i.e. rent back) if the lease is cut short.

Harbour Views: Sitting Empty

Harbour Views in Woodstock was completed at least 18 months ago, so why are there ads proclaiming that you can "BE THE FIRST TENANT"? Perhaps it's because there are nine for rent ads listed on Private Property alone...

Buy Vs Buy: Queens Gate - You Either Hate Bathrooms Or Money

Why buy a 2 bed/1 bath duplex in Queens Gate for R1 600 000, when you can buy a 2 bed/2 bath duplex in Queens Gate for R1 250 000? Is having one toilet less worth an extra R350 000? Perhaps you hate money?

Tito Chickens Out: Hikes Repo Rate 50 Basis Points

Despite threatening to hike rates 200 basis points the Reserve Bank has now decided to raise rates by the standard 50 basis points. Tito shows once again he prefers death by a thousand cuts and I wonder if this will mean 2 or 3 consecutive rate hikes in the future as Tito constantly finds himself behind the inflationary curve.

Rent Vs Buy: Rondebosch Oaks - Invest R581 000, Make No Money

Here's a 1 bedroom apartment in Rondebosch Oaks (I assume that's in Rondebosch) for R900 000, tenanted until December 2008 with a rental income of R4 200 a month. With a 100% bond the difference between the monthly bond payment (R11 851) and the rent is R7 651 a month, 1.8 times larger than the rental income itself. The payment and yield graph is:

Paying for the place in cash gets you a 5.6% return on investment. To break even on cash flow requires a 64.5% downpayment (over R580 000) and even with a 50% downpayment 2.3% capital appreciation is required to not lose any money at all.

Rent Vs Buy: Green Point

Here's a bachelor flat in Green Point on the market for R750 000 with a rental income of R3 500 a month. With a 100% bond the difference between the montly bond payment of R9 875 and the rental income is R6 375, over 1.8 times the rental itself.



Buying the place for cash gets you a 5.6% return on investment, about 5% below inflation. You're only cashflow positive with a 64.5% downpayment and with a 50% downpayment you still need 2.3% capital appreciation to not lose any money at all. In reality yields will be less once rates, levies, maintenance and vacancy are taken into account.

Our First Hatemeail!

It's taken over two years but I finally received my first ever hatemail.

People likeyou are stuffing up our country and it just makes me angry because it is a really nice country and things you say damage the economy. Take how countries such as Argentina collapsed with people creating negativity. If you are not happy then leave the country and leave it to the people who want to live here and make a difference. I want to try improve peoples lives not destroy them

Beware my words, they have awesome power! I can destroy economies with the utter of a phrase (or blog post)!

Anyway I think our hatemailer has me a bit wrong. I've never said anything negative about the country or it's people, which over the long term I am generally upbeat about. I also have never advocated leaving SA, because frankly Cape Town is a fantastic place to live.

As for me wanting to 'destroy lives', if a reader had decided to hold off buying some overpriced piece of property and rent instead while being a judicious saver and shunned debt (something I have always advocated) he may find his life a bit easier as we head into the next few years of economic turbulence.

The Media Wakes Up

Sunday Times: It’s Crunch Time

Only took them about two years to realise...

ABSA: "House prices are dropping", Agents: "DON'T PANIC!"

Remember folks: Don't panic, but if you do, be the first.

From Business Day:

Du Toit said Absa was expecting a continued decline in house prices in real terms over the next two years.

Samuel Seeff, chairman of Seeff Properties, said there was “literally no house price growth in most areas of SA”.

But Seeff said there were a “couple of areas” that were bucking that trend. “Those areas are very much the upper end of the market.

“These include Bantry Bay, Clifton and the Victoria & Alfred Waterfront (all in Cape Town). [CT Bubble - Oh I'll just buy there then, I sure can afford the R60 000+/month bond payment]

“But for the rest of the market, what we’ve seen is that in general it is stagnating, and in real terms there is a decline,” he said.

Still, Seeff said he did not “believe that we need to go into panic mode”.

So if the market is going to stagnate for two years I guess that means all that "World Cup will boost property prices" from agents and other vested interests were bulldust.

Rent Vs Buy: Claremont - Can Only Be A Terrible Investment

Here's a 2 bed apartment in Claremont described which "can only be a fantastic investment", on the market for R1 495 000 and which has a net rental of R6 050 (R6 500 gross rental - R450 levies). That means with a 100% bond the difference between the bond payment (R19 093) and the net rental is R13 043, twice the net rental itself! Here's the payment and yield graph:

Paying all in cash gets you a 5% return on investment, about 5.5% below inflation. To break even on cashflow requires a hefty 68.3% downpayment (nearly a million Rand!) and even with a 50% downpayment you need 2.9% capital appreciation (which is going to be rare when every bank is forecasting price delcines) to not lose any money at all. The returns will be even less one rates, maintenance and vacancy are taken into account.

How To Chase The Market Down In Somerset West

Reader Bean Counter sent in the following email:

In July last year this place was on the market on for R1,950,000.

In December they dropped the asking to R1,850,000.

By February it had dropped to R1,790,000.

That's how it stayed for a couple of months, until lo and behold in April they thought, 'To hell with reality, we want value!' and RAISED their price to R1,800,000.

Well, pride comes before a fall, and this week, it's down to an all-time low of R1,720,000.

You'll notice that in over a year they've dropped their asking price R230 000 from R1.95 million to R1.72 million. That only works out to a price drop of 11.8%, which is below the 13.2% drop in median property prices that Standard Bank released. In other words they are chasing the market down: you're dropping prices but the market is dropping at a faster rate, a sure fire way to not sell a house.

Simons Town: Same House, Second Auction

If the first auction in March didn't meet the reserve price, then I'm sure auctioning it again in June when the market has deteriorated further will do the trick.

Lew Geffen: The Property Market Is Dead! Drop Prices 25%!

The following is a memo sent out by Lew Geffen (the head of Sotheby's Realty) to his agents and the media:

Recessionary Strategies - State of the market

As you know the recession is biting even deeper and strategies of 3 months ago are no longer relevant. The mere fact that the banks are requiring 25 % equity indicates strongly that they have factored that the market will drop another 25% on top of what the market has already come down i.e. plus, minus 15%.

To my mind that means that the market will come down 40% from the highs of last year which is hugely significant. Take into account that today a man who wants to purchase a R2 million property which is the average selling price in our company will have to earn in excess of R87 000 gross per month in order to qualify and if the market drops by 25% that same person will need to earn R65200 gross which is also no picnic.

There are 60% less buyers in the market than recorded at the same time last year. Attendances at showhouses are generally poor (Echoes of Sharpeville) and only when the Agent has convinced the seller to use the most aggressive parameters i.e. 40% below asking price, does the showhouse receive 10 couples or more leading to a subsequent sale. All the guns are loaded against us in this market and it will take your own courage and perspecuity in order to survive.

This morning I told a member of my own family to drop his price by 25% in order to get a quick sale and I would advise you to tell your clients the same. It's a question of being truthful to your clients to save them severe pain by procrastinating and not accepting the offer today. Today's low offer is tomorrow's miracle price. This market is not going to recover anytime soon.

The tough must get going!

Signed

LEW GEFFEN

Lew must have seen what is happening in the US with massive inventories building up and has decided to take preemptive action.

Standard Bank: Median Property Price Down 13.2% Y/Y - Dropped 8% In Two Months!

Back in April Standard Bank reported the median price drop was 5.5% year over year. Now they have reported that year over year the median has dropped 13.2% which means that in a little over two months the median price has dropped another 8%! That has got to hurt!

South African median house prices fell by 13.2% year-on-year in May, with new tougher credit laws and high interest rates cutting demand, a survey showed on Monday.

A median is the middle point between the highest and lowest figures.

Sponsors Standard Bank said the decline in prices may have been overstated by high base effects due to abnormally high activity during the same month last year, but the downward trend still showed declining affordability on high interest rates.

Observatory: Languishing Property And Dropping Asking Prices

The house pictured on the left in Observatory was on sale for R870 000 in November 2007. 7 months later it's still on sale and the price has dropped R50 000 to R820 000.

ABSA: Real Price Decline Of 4.5% In 2008

ABSA, who are the largest mortgage lender in SA, are predicting a 4.5% real price decline in house prices in 2008. Jacques Du Toit is quoted as saying that for next two years there will be no real growth:

He says investors in the housing market should not expect to achieve positive real capital appreciation during the next 24 months, but with an increase in demand for rental property, an acceptable income return may be achieved during this period.

The demand for rental property is an assumption that I would not bet on as there are a lot of specuvestor properties out there standing empty that are going to be dumped on the market when they no longer appreciate at 20%+ a year further dampening prices even further and putting negative pressure on rentals.

Rent Vs Buy: Vredehoek

This 1 bedroomed apartment in Vredehoek is on the market for R995 000 and is currently tenanted for R4 250. The ad states that the levies are R697 a month which means that net rental income is R3 553 a month. If one takes out a 100% bond the monthly payments are R13 102 per month, which means that the difference between the monthly payment and the rental income is R9 549 a month, nearly 2.7 times the net rental income itself! Here's the payment and yield graph:

Buying the apartment for cash yields a 4.29% return on investment, a good 6% below inflation. To break even on cashflow a massive 73% downpayment (over R725 000) is required, with a 50% downpayment still requiring 3.6% capital appreciation not to lose any money at all. Once rates, maintenance and vacancy are taken into account the yield is even less.