It's the Saturday open thread. Now that winter is creeping into Cape Town, what role do the seasons play in the ability to sell a house?
9 comments:
Anonymous
said...
Yes winter should depress prices and yet, all that I see around me are a glut of sellers with Car,Bond and Personal debt up to their eyeballs. The latter are still listing their houses on the market at pre-recession,almost-boom prices. Coupled with this is a measly trickle of qualified buyers.
Supply and Demand would have us know that prices should therefore fall VERY significantly. And yet this is not the case: Overindebted Sellers just WON'T drop their prices. It seems the global law of supply and demand is simply not applicable to property in South Africa. What gives here? Why is there no real correction ?
Well, the answer to the home and commercial premises prices not falling to fire-sale bargain basement prices,is that even though the banks do repossess those many,many distressed properties, they just refuse to sell them at just any price. losses. The banks keep them on their books at inflated prices making their asset holdings look good on paper. They hold on to them for years if necessary, even at the cost of a permanent live-in security guard and maintenance upkeep. Bottom line is that they have enough cash to float those dead duck properties until the market inflates again.
We have adopted progressively, in the noughties, fair value accounting or mark to market. For instance if SARS deems the price you paid for a property too cheap you will pay transfer duty on the fair value it calculates! Banks cannot value properties at inflated prices, they must M2M. Now how about data gathering methods? And there’s the rub!
Before we go any further; a primer: Firstly the SARB and the Big 4 banks ARE the banking system! They must all balance at the end of the day and must be protected or the whole economy goes belly up. Remember this fact; it will serve you wisely in future investment decisions.
When you deposit money in the bank it is a loan to the bank, it is recorded as a liability. This is why they pay you interest; you are loaning them money [a bank is not a safe, happy place where money is secure and the bank is there to keep it safe for you] When you borrow at a bank they are loaning you money, you pay interest and they record it as an asset. Now this asset [your mortgage] is backed by collateral [the property itself and anything else you have pledged or whatever they can come after you for]
Ok so you buy a house. You secure a mortgage and bank pays the owner. Where does the owner put the cash? In his bank [which might be the same as yours or another]. So there exists a liability somewhere in the banking system as well as an asset. This is a simplification and I am ignoring other credit extended but you can flesh out the ramifications.
Now lets look at this a little further. If property was decreasing according to the stats and we are marking assets at market prices, what would happen? The asset side of the balance sheet would be shrinking but the liabilities remain. What happens when your assets deflate in value while your liabilities remain the same? Balance sheet not looking so hot now isn’t it? [Please see end of post for other ramifications] Secondly with assets deflating in the economy this creates even more default risk across their loans. What of the asset value of the collateral they hold through repos?
So you can see how deflation impairs the bank balance sheet while inflation makes it whole or even better! Now consider that half of the SA Banks assets are residential mortgage. Do you see why it is imperative that inflation rules the day? Do you see why we have inflation targeting?
So now you know that if worse comes to worst the SARB will defend the banks and bail them out at taxpayer expense. Now you know why I don’t see interest rates rising [besides the fact that inflation is cost push and mostly imported, not demand pull which is affected by interest rate hikes] Now you know why the ABSA, FNB yadda yadda house price indexes are cooked.
[Something to noodle on: A demand deposit is cash right now, time deposits are short term money and mortgages are long term money. Let’s say you have loaned lots of people money to buy houses, it takes 20 years for you to get your money back plus interest. What if you have many demand deposits for cash right now today that you used to fund those loans? How you going to get money to fulfil your obligations if all your demand deposit customers want to withdraw their cash today? ]
I believe this is where the US went horribly wrong. The bank 'assets' in terms of loans or credit was rated based on a scorecard system. These ratings separated the bank assets from secure to dodgy (so for example, a home loan is secure because you have the house that can be sold off to get your money back, while a credit card that bought a night out at Hooters is not that easy to recover). Large insurance companies then insured the loans (based on the rating), and investment banks allowed external investments into these loans (still an asset, so you are investing in a bank asset). So people invested in the loans, which where insured in case it went belly-up. It made the US financial system very complicated, with central bankers and Wall street heros getting richer and richer. Somehow they juggled this system of loans, insuring the loans, and investing in the loans, to such a point that the banks had almost no liabilities, only assets. The insurance companies (read AIG) had the liability. But because of the booming economy at the time, they themselves were cashing in big-time, very few insolvencies.
This meant they would loan money to anybody, it mattered not. Thus the start of the banks distributing billions to sub-prime individuals who all bought houses, yet could by no means afford the repayments. Recession came, most banks were bailed out (except the Lehman Brothers who happened to also be the biggest sub-prime home loan provider of the lot), and the people suffer, house prices crash, and central bankers retire before the age of 35. In SA however, it seems we are not that complicated yet. Banks loan from the SARB, and then loan to people. However they still hold the risk which is why we will never see prices crash like the US did (as per your explanation above). The market is based on the banks' lending criteria and for the most part, if banks start with their 100% bonds again, people can afford houses at current prices.
You do see some sound drop in prices depending on suburb though. I've noticed that (in CT for example) high BTL areas like the CBD / Seapoint / Greenpoint / Blouberg all have people trying to rid themselves of their money pits at similar prices they paid for them at the hight of the boom, some even higher. Also note the average age of the people living in the above areas. Now dwindle to suburbia where the average age is 92, you will find people marketing their houses at a sound value. All you have to do is find houses owned by baby-boomers and not Generation X 'ers and you will find decent prices and a high willingness to negotiate even up to 30% off.
If anyone is waiting for a major crash where you can pick up a 4 bedroom freestanding in Newlands for under 1 bar keep waiting, it's not going to happen. Inflation will equal the prices out over the next couple of years. Beyond what Loos says it's a terrible time to buy, depending where you look though. In my opinion, watch the banks and you will see what the market does. Once they start 100% bonds they've recovered enough from the recession to take on more risk which = easy credit which = increase in prices.
My parent's inherited a house a year ago due to a death in the family. It is located in a decent area and they are obviously keen to sell it. It has been priced very realistically at about 30% below similar properties on the market.
There has been some interest but the few people who have made offers have been unable to secure loans from the bank.
If the banks are so scared to give loans on a "good deal" they obviously know how overvalued property really is.
Somehow they juggled this system of loans, insuring the loans, and investing in the loans, to such a point that the banks had almost no liabilities, only assets. The insurance companies (read AIG) had the liability.
AIG had the liability [credit default swap] of the CDO if it went belly up. The liability of each home in the CDO was still the homeowners.
I am glad you made the point that the banks had all the "assets". If these were all true assets why was there a meltdown and bailout? In the fiat money system all assets are someone elses liability. So people have a million bucks in the bank and think they are rich; no, that is someone elses loan [in reality many peoples] to the repayment value of which you have claim to in your bank account. And the value is contingent on them having the ability to deliver that value through their future work.
2 minute noodle: Property is crashing when measured against gold. Property is stable against the rand and SA property is appreciating against the dollar. So property here is flat, appreciating and depreciating all at the same time; just pick your metric.
People are not being forced to sell for the simple reason that interest rates are at a 32 year low. If bonds doubled, which is not so difficult to imagine if you look at historical rates, then people will be burning cash and will be keen to sell at any price, especially if the asset is depreciating in price as well.
The facts are simple. Compared to salaries, houses presently are double the price they were in the 80s and 90s. Prices need to half in real terms. This WILL happen, it is not even open to debate. The only question is will it be via inflation or falling house prices or both, and if both, then what ratio.
Something else to factor in (and is a bit of a wild card) is the fake inflation figures. We all know that official inflation figures are not representing what is happening on the ground because governments have fiddled with them. So if inflation is actually higher than is being actually registered then the real house prices could be falling faster than it seems without us knowing it.
Without reliable data then historical graphs become tricky. But then again, if inflation data is really inaccurate and useless then the whole system which makes decisions based on this data is also a sham.
Which means that the world's financial system is in a total mess ... but we know that already ... and all because of a global greed based housing bubble.
We are living in a period that I believe history books will document extensively in the centuries to come ... it is hard to know how this is all going to end up but I fear it's not going to be pretty.
9 comments:
Yes winter should depress prices and yet, all that I see around me are a glut of sellers with Car,Bond and Personal debt up to their eyeballs.
The latter are still listing their houses on the market at pre-recession,almost-boom prices.
Coupled with this is a measly trickle of qualified buyers.
Supply and Demand would have us know that prices should therefore fall VERY significantly.
And yet this is not the case: Overindebted Sellers just WON'T drop their prices.
It seems the global law of supply and demand is simply not applicable to property in South Africa.
What gives here? Why is there no real correction ?
Well, the answer to the home and commercial premises prices not falling to fire-sale bargain basement prices,is that even though the banks do repossess those many,many distressed properties, they just refuse to sell them at just any price. losses.
The banks keep them on their books at inflated prices making their asset holdings look good on paper.
They hold on to them for years if necessary, even at the cost of a permanent live-in security guard and maintenance upkeep.
Bottom line is that they have enough cash to float those dead duck properties until the market inflates again.
@anonymous above.
Good point about the banks.
I am pretty sure the banks go as far as even renting out their property stock to cover expenses.
Anons,
We have adopted progressively, in the noughties, fair value accounting or mark to market. For instance if SARS deems the price you paid for a property too cheap you will pay transfer duty on the fair value it calculates! Banks cannot value properties at inflated prices, they must M2M. Now how about data gathering methods? And there’s the rub!
Before we go any further; a primer:
Firstly the SARB and the Big 4 banks ARE the banking system! They must all balance at the end of the day and must be protected or the whole economy goes belly up. Remember this fact; it will serve you wisely in future investment decisions.
When you deposit money in the bank it is a loan to the bank, it is recorded as a liability. This is why they pay you interest; you are loaning them money [a bank is not a safe, happy place where money is secure and the bank is there to keep it safe for you] When you borrow at a bank they are loaning you money, you pay interest and they record it as an asset. Now this asset [your mortgage] is backed by collateral [the property itself and anything else you have pledged or whatever they can come after you for]
Ok so you buy a house. You secure a mortgage and bank pays the owner. Where does the owner put the cash? In his bank [which might be the same as yours or another]. So there exists a liability somewhere in the banking system as well as an asset. This is a simplification and I am ignoring other credit extended but you can flesh out the ramifications.
Now lets look at this a little further. If property was decreasing according to the stats and we are marking assets at market prices, what would happen? The asset side of the balance sheet would be shrinking but the liabilities remain. What happens when your assets deflate in value while your liabilities remain the same? Balance sheet not looking so hot now isn’t it? [Please see end of post for other ramifications] Secondly with assets deflating in the economy this creates even more default risk across their loans. What of the asset value of the collateral they hold through repos?
So you can see how deflation impairs the bank balance sheet while inflation makes it whole or even better! Now consider that half of the SA Banks assets are residential mortgage. Do you see why it is imperative that inflation rules the day? Do you see why we have inflation targeting?
So now you know that if worse comes to worst the SARB will defend the banks and bail them out at taxpayer expense. Now you know why I don’t see interest rates rising [besides the fact that inflation is cost push and mostly imported, not demand pull which is affected by interest rate hikes] Now you know why the ABSA, FNB yadda yadda house price indexes are cooked.
[Something to noodle on: A demand deposit is cash right now, time deposits are short term money and mortgages are long term money. Let’s say you have loaned lots of people money to buy houses, it takes 20 years for you to get your money back plus interest. What if you have many demand deposits for cash right now today that you used to fund those loans? How you going to get money to fulfil your obligations if all your demand deposit customers want to withdraw their cash today? ]
@ Goldilocks - Awesome info as usual.
I believe this is where the US went horribly wrong. The bank 'assets' in terms of loans or credit was rated based on a scorecard system. These ratings separated the bank assets from secure to dodgy (so for example, a home loan is secure because you have the house that can be sold off to get your money back, while a credit card that bought a night out at Hooters is not that easy to recover). Large insurance companies then insured the loans (based on the rating), and investment banks allowed external investments into these loans (still an asset, so you are investing in a bank asset). So people invested in the loans, which where insured in case it went belly-up. It made the US financial system very complicated, with central bankers and Wall street heros getting richer and richer. Somehow they juggled this system of loans, insuring the loans, and investing in the loans, to such a point that the banks had almost no liabilities, only assets. The insurance companies (read AIG) had the liability. But because of the booming economy at the time, they themselves were cashing in big-time, very few insolvencies.
This meant they would loan money to anybody, it mattered not. Thus the start of the banks distributing billions to sub-prime individuals who all bought houses, yet could by no means afford the repayments. Recession came, most banks were bailed out (except the Lehman Brothers who happened to also be the biggest sub-prime home loan provider of the lot), and the people suffer, house prices crash, and central bankers retire before the age of 35. In SA however, it seems we are not that complicated yet. Banks loan from the SARB, and then loan to people. However they still hold the risk which is why we will never see prices crash like the US did (as per your explanation above). The market is based on the banks' lending criteria and for the most part, if banks start with their 100% bonds again, people can afford houses at current prices.
You do see some sound drop in prices depending on suburb though. I've noticed that (in CT for example) high BTL areas like the CBD / Seapoint / Greenpoint / Blouberg all have people trying to rid themselves of their money pits at similar prices they paid for them at the hight of the boom, some even higher. Also note the average age of the people living in the above areas. Now dwindle to suburbia where the average age is 92, you will find people marketing their houses at a sound value. All you have to do is find houses owned by baby-boomers and not Generation X 'ers and you will find decent prices and a high willingness to negotiate even up to 30% off.
If anyone is waiting for a major crash where you can pick up a 4 bedroom freestanding in Newlands for under 1 bar keep waiting, it's not going to happen. Inflation will equal the prices out over the next couple of years. Beyond what Loos says it's a terrible time to buy, depending where you look though. In my opinion, watch the banks and you will see what the market does. Once they start 100% bonds they've recovered enough from the recession to take on more risk which = easy credit which = increase in prices.
My parent's inherited a house a year ago due to a death in the family. It is located in a decent area and they are obviously keen to sell it. It has been priced very realistically at about 30% below similar properties on the market.
There has been some interest but the few people who have made offers have been unable to secure loans from the bank.
If the banks are so scared to give loans on a "good deal" they obviously know how overvalued property really is.
Anon,
Somehow they juggled this system of loans, insuring the loans, and investing in the loans, to such a point that the banks had almost no liabilities, only assets. The insurance companies (read AIG) had the liability.
AIG had the liability [credit default swap] of the CDO if it went belly up. The liability of each home in the CDO was still the homeowners.
I am glad you made the point that the banks had all the "assets". If these were all true assets why was there a meltdown and bailout? In the fiat money system all assets are someone elses liability. So people have a million bucks in the bank and think they are rich; no, that is someone elses loan [in reality many peoples] to the repayment value of which you have claim to in your bank account. And the value is contingent on them having the ability to deliver that value through their future work.
2 minute noodle: Property is crashing when measured against gold. Property is stable against the rand and SA property is appreciating against the dollar. So property here is flat, appreciating and depreciating all at the same time; just pick your metric.
CJ Says
People are not being forced to sell for the simple reason that interest rates are at a 32 year low. If bonds doubled, which is not so difficult to imagine if you look at historical rates, then people will be burning cash and will be keen to sell at any price, especially if the asset is depreciating in price as well.
The facts are simple. Compared to salaries, houses presently are double the price they were in the 80s and 90s. Prices need to half in real terms. This WILL happen, it is not even open to debate. The only question is will it be via inflation or falling house prices or both, and if both, then what ratio.
Something else to factor in (and is a bit of a wild card) is the fake inflation figures. We all know that official inflation figures are not representing what is happening on the ground because governments have fiddled with them. So if inflation is actually higher than is being actually registered then the real house prices could be falling faster than it seems without us knowing it.
Without reliable data then historical graphs become tricky. But then again, if inflation data is really inaccurate and useless then the whole system which makes decisions based on this data is also a sham.
Which means that the world's financial system is in a total mess ... but we know that already ... and all because of a global greed based housing bubble.
We are living in a period that I believe history books will document extensively in the centuries to come ... it is hard to know how this is all going to end up but I fear it's not going to be pretty.
Lol, drama queens :)
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