Auction Alliance Breaking Records - Auctions Up 70%

Auction Alliance will be auctioning off +-210 properties this month, the first time they've broken 200 ever. This is a 70% jump from last year September when only 120 or so properties were on the block. A significant chunk of the residential properties are part of ABSA's deal with Auction Alliance through the Rapid Auction Program, a scheme helping to prevent ABSA become, as one source states, 'the biggest landlord in the country'.

Saturday Open Thread

Time for our Saturday open thread...

ABSA Finally Releases House Price Index: Down 9.6% In Real Terms

In our last Saturday Open Thread a reader wondered why ABSA had delayed releasing their August house price index report? Well he emailed later:

I raised the issue that the Absa house price index was late. As you can see they were just delaying the bad news. 9.6% decrease in real terms of large segment housing. Check out the link

Trevor Manuel Quits Along With 10 Senior Cabinet Ministers

Trevor Manuel and 10 Cabinet ministers quit

Finance Minister Trevor Manuel is among 11 Cabinet ministers and three deputy ministers who have resigned.

Their letters of resignation had been received by President Thabo Mbeki "which, regretfully, he has had to accept", the presidency said in a statement on Tuesday.

They included Deputy President Phumzile Mlambo-Ngcuka, who earlier in the day announced her resignation from the position, to which she was appointed after ANC president Jacob Zuma was released from his responsibilities as deputy president in 2005. One of the reasons she gave was to allow a new president the opportunity to choose their own deputy.

The other resignations were of the Ministers of: Defence, Mosiuoa Lekota; Minister in the Presidency Essop Pahad; Intelligence, Ronnie Kasrils; Correctional Services Ngconde Balfour; Public Enterprises, Alec Erwin; Science and Technology, Mosibudi Mangena; Public Works, Thoko Didiza; Provincial and Local Government, Sydney Mufamadi; and Public Service and Administration Geraldine Fraser-Moleketi.

So long Trev!

CPIX Continues To Climb

Surprise! CPIX is continuing to climb despite every bank economist telling us that the inflationary peak had been reached.

Consumer inflation seen accelerating

The consumer price index excluding interest rates on mortgage bonds (CPIX) should accelerate in year-on-year terms to 13,3% in August from 13% in July, RMB financial markets research said on Monday.

RMB forecast a month-on-month increase of 0,5% in August CPIX.

"The upward pressure on the index will probably come from higher processed food prices and residual increases in electricity tariffs and housing costs," RMB said.

Rent Vs Buy: Cape Town CBD - R2.4m Invested, R0 Returned

This loft is on the market for a cool R3 400 000. It attains a gross rental of R15 000, minus rates/levies of R2 000 to give you a net rental income of R13 000/month. With a 100% bond the difference between the monthly bond payment of R46 031 and the rental income is R33 031/month more than twice the rental attained every month!

Now before we go to the payment and yield graph click on that picture on the left. That's what 3.4 bar is going to get you. I've seen warehouses in Montague Gardens look more homely.

Here's the payment and yield graph:

Paying for the place in cash will get you a 4.59% return on investment, about 7%-8% below inflation. With a 50% deposit you still need 3.54% capital appreciation not to lose any money and if you want to be cashflow positive well you're going to have to put down a whopping 71.76% downpayment!! That means you have to invest R2 439 797 to make R0 back. What a deal, I'll take two!

The Great South African Real Estate Agent Cull: 18 000 Gone

Credit Act takes toll on 18 000 estate agents

As the interest rate hikes bite, the number of potential home buyers has halved and houses are spending double the time on the market than previously, spelling hard times for estate agents.

At least 18 000 of them have lost their jobs in the last year as they struggled to sell over-priced homes in a climate in which consumers can't afford to spend.

Estate Agency Affairs Board (EAAB) chief executive Nomonde Mapetla said the economic slow-down has resulted in the number of estate agents registered with them dropping from about 78 000 last year to 60 000.

By some estimations SA can only support 30 000 - 40 000 estate agents, which means there's another 20 000 to go.

And of course the blame for everything goes to the NCA not the more obvious choice of ridiculously high property prices requiring a takehome pay of close to R40 000 a month to afford the average house.

Business Day: We're Notoriously Gloomy, But Correct

Business Day reads our blog it seems:

WITH more than half of employed South Africans now estimated to have impaired credit records due to late or nonpayment of debt, debt counselling company Consumer Assist said recently SA needed a further 2500 debt counsellors to cope with a looming consumer crisis.

That prompted a response from one notoriously gloomy (and so far correct) blogger on the Cape residential property market.

Writing under the pseudonym of CT Bubble, he suggested that there would soon be plenty of unemployed estate agents out there.

These newly jobless agents could not only find new careers as counsellors but also help fix some of the trouble they caused in the first place when they encouraged people to buy what they couldn’t afford.

Ouch.

Here's original blog post they're talking about: Demand For Credit Counsellors Skyrockets.

Saturday Open Thread

Time for our Saturday Open Thread!

Rent Vs Rent: De Waterkant

Aaaah the De Waterkant, the land of shitty rental returns. Why rent a 3 bedroomed house for R20 000/month when you can rent a 3 bedroomed house for R9 500/month. Now while the first ad might be for a furnished home and that ads to the rental there's no way it can account for 110% difference in rental returns.

FNB: Bad Debts Up 180%!

Moneyweb reports:

FirstRand reports bad debts at R4,7bn

FirstRand Ltd, South Africa's second-biggest banking group by assets, reported a 13 percent fall in full-year normalised headline earnings on Tuesday, and said credit market conditions remained challenging.

The firm, the last of the country's four big banks to report full-year results, said normalised headline earnings for the year to end June were 8.8 billion rand.

FirstRand said it had been hit by slower asset growth and higher bad debts at its retail units. Bad debts at its retail unit were at 4.7 billion rand versus 2.6 billion rand in the previous corresponding period.

Rent Vs Buy: Plattekloof - R2 Million Invested = R0 Returned

Here's a house in Plattekloof on sale for R3 395 000 with a rental income of R18 000 (despite the ad saying it's newly built and looks empty). That means with a 100% bond the difference between the monthly bond payment of R45 964/month and the rent is R27 964/month. If you're fully geared you'll be losing over R335 000 every year! Here's the payment and yield graph:



So paying for the place in cash gets you a mediocre 6.36% return on investment, about 6% below inflation. With a 50% deposit you still need 1.76% capital appreciation to not lose any money at all and to break even on cashflow requires a deposit of over R2 000 000! Who would've thought it would have worse returns than a flat in Ocean View Drive. Once costs are taken into account such as maintenance, vacancy and rates the returns are even worse.

Merrill Lynch, Lehman Brothers No More!

What the HECK just happened in America?!? Two major investment banks have been dismantled in a little over a weekend. Lehman Brothers is about to enter bankruptcy and Merrill Lynch is to be taken over by Bank of America. Has this EVER happened before?

Saturday Open Thread

Time for our weekly Saturday open thread.

FNB: Even Rental Activity Is Declining

Renting the way to go

The decline in the number of first-time home buyers has made the rental option more attractive, but people looking for homes to let are limited by affordability, say estate agents.

The FNB Residential Rental Barometer for the second quarter of 2008, released yesterday, showed a decline in activity from a rating of 8.4 to 7.6 . Agents who were polled for the national index said only 59 percent of rental properties on their books were snapped up in less than a month, compared with the 75 percent take-up recorded in the first quarter of the year — a 16 percent decline in activity.

The main reasons given for slowed activity was a 7.43 rating of landlords asking high rentals, and a 6.73 rating for the letting market being a tenants market.

Please note the sentence that I emphasised in the above quote. With the property bubble collapsing landlords (especially the recent buy-to-let crowd who have been losing thousands every month covering bonds that rentals don't pay for) have been hoping that with less property purchases there would be more demand for rental and so rentals will go up. Well as I expected the opposite has happened because in an economic downturn raising rentals, especially with reliable tenants, is a one way ticket to an empty 'investment' property.

Rent Vs Buy: Diep River - Great Opportunity To Lose Money

Here's a 2 bedroomed flat in Diep River on sale for R925 000 with a current rental of R4 800. "GREAT OPPORTUNITY FOR INVESTORS!" shouts the ad. That means with a 100% bond you'll be losing R7 723 every month, which is about 1.6 times the gross rental income. Here's the payment and yield graph:



So paying in cash gets you 6.23% return on investment a good 6% below inflation. With a 50% deposit you still need capital appreciation of 1.9% to not lose any money and to get cash flow positive on the rental income alone requires a 61% downpayment of over R570 000. Take into account ownership cots: rates, levies, maintenance and vacancy and returns are even less.

Clem Sunter: Things Are Going To Get Very Bad

Sub-prime at SA's door

"We haven't seen this since late 1970s," he says.

Sunter points out that one of his friends who wants to retire in the UK is trying to sell his home for four-million pounds, but the best offer he has received is just 1.6-million — 40 percent of the asking price.

"It has even spread to South Africa — you can't sell a house here," said Sunter.

"Things are getting very tough," he said.

"We had minor recessions in 1998 and 2001 — but nothing like we are seeing now," he said.

US Housing Market Nationalised

The US government has taken over control of Freddie Mac and Fannie Mae, who between them own 50% of all mortgages in the USA. In other words, the US housing market has been nationalised to prevent a collapse. So much for a free market eh?

Saturday Open Thread

Got something to discuss that we haven't covered? It's time for our Saturday open thread.

Rent Vs Buy - Bergvliet: Dreams Turn To Nightmares

This house in Bergvliet on the market for R1 850 000 is described as an "INVESTORS DREAM" and is tenanted at R8 500 a month. Buying this on a 100% bond means that the monthly bond payments will be R25 046 a month and the difference between that and the rent is R16 546, nearly twice the rental itself. Here's the payment and yield graph:


If you're the buyer you need to put down a massive 2/3 downpayment (over R1.2 million) to break even on cash flow and even with a 50% downpayment you need a capital appreciation of 2.61% to not lose any money at all. Paying for the place in cash gets you a dismal 5.51% return on investment.

Rent Vs Buy - Gardens Commercial Property

Here's a house in Gardens that has been turned into a small office. It's on sale for R3 400 000 and is tenanted on a two year lease at R18 000. Now before we do anything we need to remember a few things. Firstly this is a commercial property which means that a 33% downpayment is almost certainly mandatory. Secondly because this is commercial property, cash flow is king! Capital appreciation shouldn't even enter the equation.

So what's the yield and payment graph on this place. Let's check it out:


So putting down the minimum required downpayment nets us -13% return on investment, as every month you'll be paying in over R10 000 to cover the bond. Paying for the place in cash gets you 6.35% ROI, about 5%-7% below inflation.

Capital Appreciation Clowns Revealed

This ad for a bachelor flat in Long Street on sale for R399 000 is indicative of how some people (Capital Appreciation Clowns as they've been christened on Realestateweb message boards) have been buying property and relying on nothing else but capital appreciation wheb buying property:

Bachelor flat on Long Street. Superb position. Keen tenants paying R3000 per month - it is a lower than average rental because we told them we were going to be selling. Selling at way under value. Our bond is R450000.00. Remax gave a written valuation saying we should be marketing the flat at R530000.00. Reasonable offers will be considered.

The bond is R450 000 with a tenant paying R3 000 a month, which means every month they're currently paying in R3 092 to cover the difference between the bond payment (R6 092) and the rent, and remember that's gross rental - after expenses like rates, levies and other costs decrease the net rental income.

But you say "The seller is a victim of high interest rates!" but even if we reduce interest rates to 10%, the record lows they reached a few years ago our the seller was still losing R1 342 a month from paying in the difference to the bond.

If the R450 000 bond is indicative of the purchase price of the apartment then we are looking at a potential 11% nominal price drop. Factor in inflation and the loss is closer to 20%.