IOL Wakes Up: Yeah We Might Have A Property Problem

I believe this is the first time I've seen an article on the IOL (South Africas' largest newspaper groups) homepage talking about there being problems in the property market.

Property market in crisis

After a four-year boom during which prices soared, the property market is in crisis, with consumers facing a desperate struggle to get finance to buy or build homes.

Almost 40 percent of would-be borrowers have had their home-loan applications rejected by the four biggest banks since the beginning of the year as the credit crunch, sparked by stringent lending laws, rising inflation and higher interest rates, bites ever harder. Rejection rates have reached record highs.

...

With inflation reaching 13 percent last month, consumers are under pressure - they have racked up more than R1 trillion in household debt, up from R378,5-billion in 2002. They are now being forced to cut back on spending because of higher interest rates and the rising cost of living.

Household debt has TRIPLED in 5 years! Sweet googly moogly that is treading some dangerous water. But of course never fear... the World Cup will save us!

"However, the 2010 soccer World Cup could offset the current negative view of South Africa as an investment destination and this could drive momentum in the residential property market," he said.

Saturday Open Thread

Time for our weekly open thread. Got anything you want to discuss we haven't covered?

REMAX: Sales Are Down 36% - 50%

RealestateWeb reports:
SA's property market crash: grim new stats

There has been a 38% year-on-year decrease in the amount of national property sales transactions (across all property price brackets) between January - July 2008, compared to the same period 2007.

Total properties valued under R499 000 sold this year is 36% less than in 2007. Overall, the amount of sales transactions has decreased year-on-year by 42% for properties priced between R500 000 - R749 000; 39% for properties in the R750 000 - R999 999 price bracket, and 33% for properties with a R1 million to R1, 499 999 value.

In the higher price brackets, the largest decrease is recorded in the R1,5 - 2,5m price bracket: total properties sold so far this year is almost 50% less, compared to properties sold in this value bracket in 2007.

Rent Vs Buy: Protea North Wharf - Invest R1.4 Million, Make R0

The Protea North Wharf is another one of those hotels where the hotel owners get their upfront costs subsidised by "investors" who buy rooms (or rather some vaguely defined 'right' to the rooms income) and then get a share of the profits. Now the market for re-selling these 'rooms' is pretty much non-existent so I'm not so certain this 'room' at the Protea North Wharf on the market for R2 200 000 will sell for anything close to that. The ad claims the "average rental" is 10 000 a month which means with a 100% bond the deifference between the monthly bond payment (R29 785) and the rent is 1.9 times the rental itself (R19 785). Let's look at the payment and yield graphs:

So if you plonk down the full R2.2 million asking price in cash you can expect 5.45% return on investment, less than half of the 12%-13% you could get just leaving your money in a fixed deposit. To break even on cash flow requires a 66.43% downpayment, over R1.4 million, and even with a 50% downapayment you still need 2.67% capital appreciation to not lose any money at all.

There are a number of other reasons why this place will probably wind up earning a lot less in income. For one the hotel takes a cut of the rent (can be as high as 40%), and it's not clear here if the R10 000 a month is before or after that is taken into account, although we have assumed it's after. Also this is a hotel room which requires constant maintenance and cleaning so expect levies and maintenance charges to be higher than normal. And as I mentioned before the resale market for these is virtually non-existent.

Trevor Manuel: Stop Spending Money You Don't Have

'S Africans act like Americans'

Finance Minister Trevor Manuel said on Tuesday evening that South Africans were not adequately saving for tomorrow and preferred instead to consume in a US-like manner.

He said households were highly indebted and consuming in a manner that mimicked patterns in the US.

"They live on debt and are highly leveraged. It is not a basis of stability," said Manuel.

"If they are borrowing for consumption then there is something wrong in the equation," he emphasized.

Manuel said inflation targeting was a necessary policy as inflation hit the poor and those relying on a fixed salary the hardest and thus price stability was needed.

Urgent Property Sales Continue To Increase

Back in December I noted how the number of ads containing the word "urgent" had gone from 1 ad every 3 days in August 2007 to 20 ads in a a few days on Gumtree. Today I tried it again and there are 16 ads containing "urgent" in the past 24 hours alone.

Saturday Open Thread

Got something to discuss that we haven't covered?

50% Of Employed South Africans Can't Pay Debt!!!

Sweet googly moogly! Things are going to get crappy for a lot of people.

Six million can’t pay their debts

Experts told The Times that the economic “perfect storm” — high inflation, including food and fuel, and the resultant interest rate hikes — have driven six million South Africans to the brink.

Rajeen Devpruth, manager of statistics and research at the National Credit Regulator, said that by the end of last year, 6.3 million South Africans had “impaired credit records”, which means their payments were more than three months in arrears or judgment had been obtained against them for outstanding payments.

That’s half of the 13 306 000 South Africans currently employed, according to the latest Labour Force Survey in September 2007.

I Know! Let's Drop The Price 2.7%!

Our favourite Simons Town McMansion foreclosure has had a price drop! Instead of R3 600 000, the've slashed the price to R3 500 000! That's 2.7% off! It's a bargain now!

Johan Rupert: Downturn Will Last 5 - 10 Years

Rupert remains a bear

Remgro chairperson Johann Rupert told shareholders at the group's AGM in Stellenbosch on Thursday that the downturn globally - triggered by the sub-prime crisis - could be a prolonged affair.

Rupert, who warned of the financial crisis early last year, said the downturn - or recession - could last between five to 10 years as banks and major financial services companies cleaned up their operations.

"It's been a bit like getting overweight from eating, drinking and smoking too much, and then been told you have to run a marathon. For some it would take three years just to walk a marathon. So now you have frantic attempts by investment banks to get assets off their balance sheet."

"The best we can hope for - and it won't be quick - is that the system won't collapse in the process."

Ballinrobe: Will They Ever Finish It?

Reader PJ writes in:

I drive past Ballinrobe, a new development being built on High Level Rd in Sea Point every day. The site was empty for at least a year before they started building and in the past year they have been building all they seem to have put in is some foundation pillars. I have yet to see more than 4 workers on the site at any one time. The past two weeks all I saw was two workers who didn't seem to be doing much.

The original completion date was supposed to be June 2008 but they've pushed it back to June 2009, although at the rate they are going June 2010 seems more realistic. The sign on the site claims it's 70% sold, 100% I would guess are speculators. This place must've gone on sale in 2006 at the height of the boom and is going to be completed right in the middle of the property bust. If anything with the lack of workers and progress it looks to me like they're trying to draw out construction so it's completed when (they hope) the property market recovers.

Any readers out there have any more information about this place?

Demand For Credit Counsellors Skyrockets

Thousands more debt counsellors needed

South Africa needs 2 500 more debt counsellors to cope with its growing consumer crisis, debt counselling company Consumer Assist said on Wednesday.

The company's chief executive officer Andre Snyman in a statement said: "The counsellors were needed "to cope with the needs of more than six million indebted consumers, who are losing homes at the rate of 2 000 a month and 6 000 cars a month",

Well there's plenty of estate agents about to hit the pavements due to the "Great South African Estate Agent Cull" so there's one possible source of candidates. They can help their clients who they advised to get into debt in 2006, to get out of it in 2008.

REMAX CBD Inventory Jumps

Does anyone out there track the REMAX inventory in the City Bowl? According to PropertyGenie their inventory has grown by nearly 200 properties in the past week alone.

Update: Seems to have been a computer glitch.

The Estate Agent Cull Hits Sea Point

The Atlantic Seaboard is supposed to be one of the hot spots of the property market in South Africa, supposedly immune to the turbulence elsewhere. But down on the street it's not so rosy. Reader PJ writes:

Took a walk down Sea Point Main Rd and saw that two agencies have recently closed (International Realtors, Wendy Machanik Properties) and one moved to a smaller office (Lew Geffen Sotheby's).

Asking Prices Drop - Vredehoek: 31% (R400 000+) Price Drop

Here's an ad from April for a one bedroomed apartment in Vredehoek:

Charming one bedroom apartment in secure, small, upmarket and sought-after block. Private garden with views of city and Lion's Head. Secure off-street parking

And here's an ad from July for seemingly the same flat (same pictures, almost same description):

Beautiful sunny one bedroom flat with private garden. Small, secure and upmarket building, Vredehoek. Undercover, secure parking. Views of the city and Lion's Head.

The only difference, is the asking prices. The first ad had an asking price of R1 300 000, the second had an asking price of R895 000.

Now that original R1 300 000 asking price was probably never going to be reached but it just goes to show the 'wealth entitlement' people had. They deserve that million rand asking price damn it! It doesn't matter what people can afford!

Saturday Open Thread

Want to talk about something we haven't covered? It's time for our Saturday open thread.

I Know! Let's Drop The Price 2%!

Folks, if it's not going to rent at R5 000 a month, it's not going to rent at R4 900 a month.

FNB: Thank Us Later For Denying You A Bond And Losing Your Deposit

If you put down a deposit on a property and FNB reassessed your loan and denied you your bond causing you to lose your deposit, FNB says that you should thank them because in actual fact you probably were going to lose a lot more money later on:

Some home buyers could lose deposits

Kleynhans said it was possible some customers might lose their deposits on houses if they did not get the bond.

But, he said, the loss of a R30 000 or R50 000 deposit might "in the grand scheme of things" be better for the applicant than a much bigger loss if the client could not service the bond.

It was possible that if the customer was later forced to sell the property he could find himself with a shortfall of R200 000.

Let's say that R50 000 was a 10% deposit. That means the selling price was R500 000. If there's a shortfall of R200 000 then FNB are seeing a 40% nominal drop in house prices. Ouch.

Standard Bank: Our Bad Debts Are Rising

Standard Bank Q1 normalised headline EPS up 7%

STANDARD Bank posted a 7% rise in first-half normalised headline earnings per share (EPS) to 481,8 cents today, but said rising bad debts meant it could not give full-year guidance.

Rent Vs Buy: Strand - Invest R430 000 And Make Nothing

I thought small bachelor flats were the place to go for high yields? This bachelor flat in the strand is on the market for R599 000, while it currently commands a monthly rental of R2 200 a month. That means that with a 100% bond the difference between the monthly bond payment of R8 109/month and the rent is a whopping R5 909, nearly 2.7 times the size of the rent itself! Here's the (dismal) payment and yield graph:

Right so buying the place in cash gives you a fantastic 4.41% ROI, only about 7% below the official inflation figures. You break even on cash flow with a massive 72.87% downpayment of over R430 000.

The Ugliest House In Cape Town

I think I've found it and it's going for a song at R14 500 000 (available for R2 million cheaper at R12 500 000 over here). Have a look at this 3 storey monstrosity:

What the hell is that? Seriously it looks like something I used to build with Lego when I was 5. I particularly love how the entire property is paved to remove any semblance of greenery (except for that horrid paint job). I hope the architect ain't putting that on his CV.

Black Diamonds Hit The Credit Wall

One of the "saviours" of the housing market is supposed to be the Black Diamonds, the young black professionals who have been spending money like crazy the past few years. Only one problem though, they've been spending borrowed money (mainly via credit and store cards) and getting into a heap of debt, and now that debt is becoming overwhelming.

'Black diamonds' feel the credit crunch

Thembi Motaung, a manager at a South African legal firm, faced a painful choice when she started to fall behind in meeting hefty loan repayments on both her home and car.

"I had been defaulting on both my mortgage and car repayments for three months, so I had to choose which one to let go," said the 36-year-old mother of two who lives near Pretoria.

"I've been using public transport all my life so I found it easier to do without the car."

Having had to let go of her much-cherished Audi A4, Motaung joined a growing number of South Africa's so-called "black diamonds" who had fallen foul of the credit crunch and faced the heartache of repossession.

While a rise in interest rates, inflation and food and fuel prices have hit all sectors of South African society, research shows that the biggest sufferers have been members of the emerging black middle class.

Saturday Open Thread

Time for our weekly Saturday open thread. If you've got anything you want to discuss about housing and real estate in Cape Town and South Africa, this is the place.

Trafalgar: Rental Vacancy Increasing

With inflation rising all the landlords out there are starting to think that now is the time to raise rent. Not so fast:

Middle-income households who rent are beginning to show economic stress, Andrew Schaefer, managing director of national property managers Trafalgar, said on Thursday.

"Our offices throughout SA report that vacancies in flats renting at R4 000 to R7 000 per month are rising, a typical occurrence in the late downward phase of the economic cycle," he said.

Raising rent in an economic downturn is the best way to find yourself sitting with an empty flat. Good tenants are worth their weight in gold.

Also I don't think we're in the 'late downward phase of the economic cycle'.

Ooba Confirms Property Market Troubles

Ooba (formerly MortgageSA before deciding to listen to some idiot consultant and change their name to something which makes no sense) have released the 'Oobarometer' which tracks house prices and (suprise!) it confirms the market is tanking.

THE fact that residential property prices are on the decline was given further confirmation yesterday with the launch of Ooba’s own house price index.

This showed prices had fallen 1,4% since June.

Ooba, SA’s largest bond orginator, which has a market share of 25%, said its index, called the Oobarometer, showed the average price of a property acquired last month was R782385, down 1,9% from July last year, when the average price was R798300.

And with inflation at 10%-12% that's a 12%-14% drop in real terms. If you took out a mortgage in the past year there's a good chance you're now paying more for an asset (and about to pay even more when the interest rate goes up next week) that is worth less than it was a year ago.

Rent Vs Buy: Stellenbosch - Playing Fast And Loose With The Truth

Here's a 2 bedroomed apartment in Stellenbosch on sale for R850 000 with a current gross rental of R4 000/month. Let's have a look at part of the ad:

Located in the Stellenbosch Golden triagle with 5 year growth of 23%-28%. The monthly rental income of R4000 will cover 40% of your bond repayment or be a usefull passive income for the cash buyer.

First off, if you get 23-28% of growth in the next five years you'll be extremely lucky, considering prices are trending downwards and only sub R500 000 properties in impoverished areas like the Cape Flats are seeing any growth. Secondly R4000 won't cover 40% of your bond because the advertiser hasn't yet taken off ownership costs like levies, rates, maintenance (and a student flat in Stellenbosch will require more maintenance than usual) and vacancy. And thirdly if you're a cash buyer you're much better off leaving your money in a fixed deposit where the 12-%13% interest you'll receive is more than double the 5.65% yield on this place. Here's the income and yield graph:

So as we mentioned before paying in cash gets you 5.65% yield, about 6% below inflation. A 65% downpayment is required to be cash flow positive and with a 50% deposit you still need 2.48% capital appreciation to not lose any money. And as we mentioned before, the returns are less once ownership costs are taken into account.

Tito: Inflation Targeting Is Here To Stay

Tito sticks to his guns

South Africa was better off with using inflation targeting as an instrument of monetary policy, the governor of the SA Reserve Bank (SARB) said on Tuesday.

"Let's stick to it for now," he told a gathering of Wits students.

He said while there were those who argued that alternative instruments could be used to fight inflation, these instruments - such as forcing banks to increase their reserves - weren't useful.

Mboweni said that lately, there had been calls to abandon inflation targeting.

"But that's because rates are high - when rates were low, no one called for inflation targeting to be shelved."

ABSA Bad Debts Hurt Barclays

Buried in this article on the mounting losses in British banking is this little nugget:

Barclays is forecast to reveal a 35% drop in profits to £2.6 billion as bad debts around the world, particularly in South Africa, combine with further losses from its exposure to the credit markets.

Now Barclays are the majority shareholders in ABSA so I assume it's ABSA that is the problem. And yet in the local press ABSA and the other banks are continuing to claim that there's nothing wrong and their bad debts are still at record lows, despite the fact they are canceling already approved bonds! I have a feeling the SA banking industry is being less than forthcoming.

FNB: We're Cancelling Approved Bonds

Here's a bit of a bombshell. FNB are going to be cancelling approved bonds on a 'large scale'. Realestateweb reports:
Home loan shocker: FNB pulls plug on property credit

Property deals are set to crumble, leaving developers, estate agents and conveyancers scramble to cover costs, as one of the biggest banks withdraws approved mortgage offers "on a large scale".

It's not just service providers who will be knocked financially: buyers and sellers with deals from other banks could find themselves high-and-dry where FNB pulls the plug on a key buyer in the chain.

FNB, one of the big four and part of the FirstRand group (JSE:FSR) listed on the JSE, confirmed to Realestateweb.co.za today that will withdraw home loan approvals "on a large scale".

Rent Vs Buy: Blouberg - R1 000 000 Invested, 0% Return

Here's a two bed apartment in Blouberg on the market for R1 590 000 (for "Investors" only the ad says, good way to exclude 95% of the property purchasing public out there) and renting out for R8 000 a month with a 10% escalation to R8 800 set to kick in in April 2009. Levies are R1 500 a month which means that the net rental income will be R7 300 a month. With a 100% bond the difference between the monthly bond payment of R21 526/month and the rental income is R14 226, nearly twice the rental itself. Here's the payment and yield graph:



So buying the place in cash gets you a terrible 5.51% return on investment, about 6%-7% below inflation. To break even requires a 66% downpayment of over R1 000 000 and with a 50% downpayment you still need 2.61% capital appreciation to not lose any money at all. Returns will also be less once rates, maintenance and vacancy are taken into account as well.

Standard Bank: House Prices Will Keep On Dropping

No respite soon for falling house prices

The residential property market is unlikely to escape its quagmire soon despite interest rates being near or at their peak in the monetary policy tightening cycle.

Sizwe Nxedlana, a Standard Bank property economist, said residential property prices were unlikely to recover in the near term due to the precarious state of household finances.

Nxedlana said the residential property market was driven by interest rates, inflation, employment growth and consumer sentiment. These drivers suggested the market would stay weak over the next year.

Rent Vs Buy: Table View - Wait Till After September...

Here's a 36 m^2 apartment in Table View on the market for R599 000 with a net rental income of R2 265 (R2 800 rent - R325 levy and R210 rates). It must be sold before the end of September says the ad. Or what? They'll increase the price again?

With a 100% bond the difference between the monthly bond payment of R7 446 and the net rental income is R5 181, over 2.2 times the rental itself. What's worse is that this apartment was on the market for R625 000 (for 36m^2 in Table View !?!) and if you'd bought it at that price you'd be covering a shortfall of R6 196 a month. Here's the income and yield graph:

Right so putting down a 50% deposit required 6% capital appreciation to not lose any money, while you'll only break even on cash flow with a 69.58% downpayment. If you buy the place in cash you'll make a pretty dismal 4.94% ROI, about what you could expect if you just left your money in a checking account. And once maintenance and vacancy costs are taken into account returns will be even less.