Saturday Open Thread

It's the Saturday Open Thread!

Hayibo Tears Parklands A New One

Online satire site Hayibo had this to say about Parklands, our choice for worst suburb in Cape Town:

'Apocalyptic' Parklands in Koeberg meltdown scare
Disaster management teams were rushed to Cape Town's Koeberg nuclear reactor this morning amid reports that a suburb near the power plant had been devastated by radiation. Rescuers confirmed that they had found a "desolate wasteland populated by dazed zombie-like people" but added that there was no need to panic as this was "an average day in Parklands".

...

"It strikes your soul. It's a deep, tearing sadness than human beings can want to live in face-brick McMansions built on shifting beach sand, between a highway splattered with squashed skunks on the one side and an unstable nuclear reactor on the other."

Thanks to reader Bean Counter for the link

Milnerton: Royal Carlisle Developers Slashing Prices

Royal Carlisle is an about to be completed (transfer in May 2009) development in Milnerton and is supposedly 80% sold out. That last 20% however is turning out to be tougher than expected.

2 bed/1 bath apartments were on the market for R790 000 and are now going for R590 000 while 1 bed apartments were going for R550 000, then according to the developers own site, reduced to R490 000 and now down to R420 000. And these reductions are taking place for a block that only requires a R10 000 deposit and offers R3 500/month rental assistance!

I would hate to be one of the early buyers who bought off plan at R790 000 (or even R490 000) only to watch over 25% of my 'investment' disappear.

Saturday Open Thread

It's Saturday and that means... open thread!

Rent Vs Buy: Sea Point - Quiet Road = Silent Profit

Here's a 2 bed apartment in Sea Point in a 'quiet road' (does such a thing exist in Sea Point?) on the market for R980 000. It achieves a gross rental of R3 900/month. With a purchase price of R980 000, monthly payment on a 100% bond will be R12543/month and the difference between rental and bond payment is R8643, well over twice the gross rental (and the net rental income would probably be closer to 2.5 times if note more). Here's the income/yield graph:

Buying in cash you max ROI is 4.78%, about 5%-6% then leaving your money in the bank. With a 50% downpayment you still need 2.8% capital appreciation to not lose any money and you'll only be cash flow positive with a 68% downpayment (over R675 000!). Add in expenses like rates, maintenance and vacancy and the results are even worse

Rent Vs Buy: Gordon's Bay Never Disappoints

Staying in the Helderberg-ish area let's have a look at this 2 bed flat in Gordon's Bay. It's on the market for R629 000 and has a current gross rental of R2 400/month. Taking into account the levy of R432/month leaves you with a net rental income of R1 968. So on a purchase price of R629000 with monthly payment on a 100% bond of R8051/month the difference between rental and bond payment is R-6083, over three times the net rental income! Let's take a look at the no doubt terrible yield graph:

Ouch. A 3.95% ROI if you pay in cash and a whopping 75% downpayment required to be cash flow positive. Even with a 50% deposit you still need 4% capital appreciation to not lose any money at all. Take away other costs like taxes, maintenance and vacancy and the results get even worse

Somerset West: Asking Price Down 40% But Will Double Soon

Sometimes I wonder if people read back their ads to themselves before clicking on the submit button. Observe this gem for a house on the market for R 1 720 000:

was in market 2 years ago @ R2.8m, urgent sale plse plse plse no agents, no agents comm's payable will be worth double this in few short years

So let me get this straight, in two years the asking price has declined 40%, from R2 800 000 to R1 720 000, but that's not really an indicator of anything and in another two years the price should have doubled again.

South Africa Had The Largest Property Bubble. Will Our Crash Be The Worst?

The following was written by regular reader Bean Counter:

A small piece of news that wouldn't have made it into any South African newspapers this weekend: according to a UDC economist, property prices in Ireland are going to fall 80% from peak to trough.

Let me say that again. 80 PERCENT from peak to trough.

In case that doesn't mean anything to anyone in good old sleep-walking South Africa, have a look at the graph of the Economist's figures, and see which bubble came second to our own.

We already know that the UK market is in freefall - 15% last year, another 25% estimated this year - and Spain is in deep doo-doo, as its economy based on the bubble crumbles. Lots of reports of large groups of young unemployed people spending their days sitting in town squares. For all fellow Europessimists, watch Spain carefully: it has the real potential to be become a very nasty place in the next few years. Young + unemployed + Spanish + hungry = shooting.

Finally, nobody needs an introduction to the bloodbath in the US, where liar loans were invented and where the 2009 Depression was born.

So let's look into the crystal ball, starting at the low end of the graph. If the US troughs at 30% it will have done well. God knows how far Spain will fall, but let's be generous and say it troughs at a 40% fall. Experts are predicting a total fall of 40% in the UK, but the British economy seems to be totally trashed, so I'm betting on closer to 50%. And so to Ireland.

80% sounds almost loony, but you never know. Let's be conservative, and say that Ireland will drop a total of 60% peak to trough, 20% better than the UCD people estimate.

Alarm bells going off yet? They should. It's basic maths. The bigger the bubble, the louder the pop. The higher prices rose, the further they have to fall.

Which brings me to SA, the undisputed global leader in overinflated house prices. In light of the other bubbles, is there any reason to believe we won't fall by over 60%? 70%/ 80?!

After all, our market rose by 244% between 1997 and 2005.

OK, so here's what the bulls and John Loos and Andrew Golding will say:
1) You can't compare SA to those other bubbles because our banks are healthy and our economy seems solid.
2) We're different because we had a huge segment of the population suddenly getting richer (Black Diamonds and new black elite), and that would have led to a "healthy" bubble.
3) World Cup 2010!

The World Cup is going to do exactly nothing for our economy: it did very little for Germany, and that was at the height of the boom years across the world. By 2010 the world will be picking its way out of Depression, and nobody is going to want to buy a freaking house in crime-riddle SA. So you can ignore point 3.

But how about 1 and 2? Do they hold water. I think they do, but only to a certain extent. I just don't believe that the black middle class could create that kind of supply and demand by itself.

In short I think maybe about 100% of the 244% could be ascribed to healthy, normal growth (led by the new black middle class, helping SA catch up to a normal international standard), but that still leaves 144% of speculative madness. In other words, a bubble the size of Spain's.

We will be incredibly lucky to bottom out at 40%. I think 50% is more realistic, but 60% is a possibility.

Enjoy the ride!

Saturday Open Thread

It's the Valentines Day Edition of the Open Thread

The Claremont: Asking Prices Crater

Reader BG writes:

The Claremont is a fairly new development on Claremont Main Rd. Last year bachelor apartments had an asking price of R650000 while 1 bed apartments were going for R850000. This year a 1 bed is going for R550000 negotiable! I'm unsure if that's for a bachelor apartment (15% asking price drop) or for a 1 bed apartment, which would be a 35% drop in asking price!

Sea Point: Don't Be Fooled By The Price - It's A Slum

Our regular Sea Point reporter PJ writes:

I saw this ad on Gumtree for a 90m2 flat in Sea Point going for R1.5 million. Don't let the price fool you, that block is a slum. I doubt the going rentals in that place will cover a quarter of the bond payment and maintenance costs (if there are any) must be huge.

What that photo doesn't show is immediately to your left is a Shoprite and directly across the road are a liquor store, both the biggest bergie magnets in Sea Point with various dodgy characters hanging around morning, noon and night.

Saturday Open Thread

It's time for the Saturday open thread. Here's a conversation starter: The SA Reserve Bank has cut the repo rate to 14% and people think the worst is over. The Bank of England cut their rate to 1%(!) and everyone there believes the worst is still coming.

Suprise! Worst Investment In Hout Bay Still On The Market

The worst investment in Hout Bay is still for sale! We last saw it back in October 2008 and the asking price of R6 000 000 still hasn't changed. And with the rent locked in at R28 500 for five years (seriously what idiot land lord negotiated that lease agreement), unless you put down over R3.8 million as a deposit, you'll only be losing a couple hundred thousand a year.

SA Propery Market Mauls Caprice

I remember when the local press were falling over themselves to hail former model, now lingerie saleswoman, Caprice Bourret and her "savvy" property purchases in Cape Town and Johannesburg. Oh well no more Top Billing appearances for Capirce.

Fall of the house(s) of Caprice: The former model reveals how her property assets have slumped by hundreds of thousands of pounds

If all this sounds bad, her investment in Johannesburg has fared even worse. In early 2006 Caprice decided to buy a house in South Africa because she was launching her lingerie range there.

Spurning Cape Town, she chose a wealthy suburb in Johannesburg, imagining that retail links would be easier to forge from a major business centre. She bought a four-bedroom house with one acre in the suburb of Bryanston for a bargain £300,000 and spent about £400,000 doubling its size.

The home now boasts a huge master bedroom with two fireplaces, its own private lounge and separate dressing area, a triple garage and a luxurious entertainment area featuring a bar, pool tables and dance floor. It is on the market for 5.3 million rand ( £373,000).

Caprice had expected her business to do well in South Africa - she is a fairly well known face there from her modelling days - so she bought the house purely for her own use as a base.
Caprice Bourret's home in Bryanston, Johannesburg

Since she wasn't planning on letting it she didn't take out a mortgage and paid cash instead, so it's entirely her own capital she is losing.

The rand stood at 9.5p at the start of 2006, but between April and September that year it lost 25 per cent to around 7p, where it still stands today, so even if her property had retained its original value

Caprice would have lost nearly £250,000 through the currency fluctuation alone. Factor in a 20- 25 per cent slump in house prices and the value of her investment has nearly halved.

'I know it's a bad idea to sell at the bottom of the market,' she says with a moan. ' But I am pulling my business out of South Africa and I have no more need of that house.

'I could hold on to it, but in my opinion it's going to take years before the market recovers and renting it in the meantime is a risk - and there's a much higher chance in South Africa that tenants may trash it. It seems best just to swallow my pride and cut my losses.'

Rent Vs Buy: Sea Point

Here's a bachelor flat in Sea Point on the market for R795 000, with a gross rental income of R3200. With a 100% bond your monthly payment is R10468/month, with the difference between that and the rental income being R7 268 - more than 2.27 times the rental itself! Here's the payment and yield graph:

Pay for the place in cash and you can expect a 4.83% return on investment. About 7% below what your money would earn sitting in the bank. Just to get cash flow positive you need to put down R551 984m a hair under 70%, as deposit. Put down 50% deposit and you still need over 3% capital appreciation to not lose any money at all. Take of rates, levies, maintenance and vacancy costs and the returns drop even more.