This double story house in Fernwood (in Somerset West, not Newlands) is on the market for a cool R2 400 000 and described as a 'wonderful investment opportunity'. It rents out for R9 000/month which means with a 100% bond monthly payments are R29844/month and the difference between rental and bond payment is a whopping R-20844. You'd lose close to R250 000 holding onto this while praying for +10% capital appreciation! Here's the payment and yield graph:
So paying in cash gets you a dismal 4.5% return on investment, less than half you'd get if you just left your money in the bank. You need R1.67 million (a hair under a 70% deposit) just to break even on cash flow and with a 50% downpayment you still need 2.96% capital appreciation to not lose any money. Take off rate, levies (sure to be huge for a house this size in an estate), maintenance and vacancy and that 4.5% ROI starts sliding down
25 comments:
This nis almost unbelievable, isn't it, but there are actually ADULTS out thyere who are unable to work this out for themselves
Incredible, and very scary, but true!
safe as houses nuh? BWAHAHAHA!!!
Yes this is shocking, hope people start thinking for themselves and avoid losing money like this.
I don't know whether to laugh or cry?
Maybe laugh, because those who have lots of cash are about to make a KILLING
As an ex Cape estate agent, now living in the U.K. I am delighted to be able to read the [largely] informed comment on this blog regarding the state of the market.
It is shocking how people are still suckered into buying property down there as a so called "investment", also how unaware or ignorant people seem to be about the knock on effects of the global credit crunch for SA.
I found an interesting chart recently that measured UK house prices relative to their stock market.
Incredibly it shows that the UK house market measured in this way is presently peaking - it has been this high only twice before and both times it then halved soon after.
To half, either house prices must fall by another 50% or the stock market must double. I anticipate the stock market to fall even further after this present bounce ... so no joy there. Which means that house prices in the UK probably still have a very long way to fall yet.
The affordability graph indicates that big price falls still have to occur.
If the UK house prices dive I think we can safely assume that SA's will continue diving as well.
If you rent, you are paying another person's bond and looking after it for his owner. So it is better to buy and have your own place. At he end of the day the property is yours.
I totally agree, last Anonymous, renting is just throwing money away. Oh, and plus Elvis lives in the Botriver Seven Eleven.
Unfortunately you've been left very, very far behind, Anonymous. You're dutifully repeating all the lines the banks and estate agents have so carefully taught you. They must be so proud.
If you were paying attention to the vastly changed world around you, you would know that your final sentence is just simply not true.
At the end of the day the property is NOT yours. For twenty years it belong to the bank, from which you are renting it at extremely steep interest rates, and only the smallest economic tremor can see you lose your equity, and the bank reclaim what is rightfully its own property.
if you buy a property for cash , it is yours and does not belong to the bank. You are the owner of that property and as you do not rent, you do not pay someone else bond and maintain a home that is not yours. If you buy a property for ash for R1.5M instead of paying R13000 rent a month to a landlord, calculate who is the winner at the end of 10 years.
At the end the owner has something that is his. And the tenant has nothing, just been throwing his money away
Come on, Anonymous, please focus. For starters, I'm afraid you can't base any pronouncements on buying for cash. Cash buyers are a tiny minority, and their thoughts about the market are less than irrelevant to the rest of the herd. The reason you're dangerous instead of just harmlessly misinformed is that you'll happily spout the "renting is throwing away money" line WITHOUT explaining that you're rich enough to buy for cash. The upshot is that young people hear you, believe you, and get themselves into massive debt and negative equity without ever knowing that your finances were infinitely better than theirs. Cash buyers saying "renting is throwing away money" is like having a bloke tell you that smoking is good for you, without ever revealing that he's a tobacco farmer.
But that aside, I'm afraid your figures are just silly. Are you actually suggesting that a R1.5M property can rent for R13k? I'm sorry but that's just crazy talk. I think everyone on this blog knows that depending on area a R1.5M place rents for between R4500 and R7000 per month.
To get R13k a month you'd need to offering, geez, I don't know - a R3 million house? Help me out, Bubblers.
How about a R5 000 000 apartment for R15 000/month?
Anonymous, you're off your gourd. Bean Counter is right. You certainly have not done your homework. Let's see, simply put: You have the cash nuh? So you buy for 1.5 bars nuh? And you rent out at a staggering R8k per month (for the sake of giving you the benefit of doubt). That's a ROI of R96k per annum on a 1.5 investment. BRILLIANT bru! I think I'll just plug that R1.5 bar into a nice safe money market account at 10%, take my annyal R150k, pay you 96k, and still have 54k left over for whiskey and other nice things. No wonder so many people never get anywhere. Why am I trying to explain this again?
If you rent, you are caught in the trap of having to pay for rent and bills and not being able to save for a deposit to buy a house.
If you buy a house it is because you want a nice, “permanent” place to live, where you are the boss, not because you think it will help you get rich.
Anonymous, you're so naive I'm actually having a good laugh at your expense. Ok, here's my truth bub: I actually have the funds to buy cash but I ain't nary that stupid in a deflationary market. Yes mate, it's coming, since here in circus land we generally fall 18 months behind the curve.
You seen the trade deficit yet? (you know what that is?) Anyway, exports gone and everything we eat imported against a devalueing currency blah, blah, blah. I won't bore you with the economics.
You want to buy a house? go ahead, this forum ain't for you unless you're here to actually stop and learn to think. A house is an illiquid investment and it's only an investment when you're NOT living in it (I'm just not going to try and explain that one). Problem is that you now have an 'investment that gives an average yield of around 5% if you're lucky, and which finds itself in a deflationary market, so negative equity in short order. What's so difficult to understand about that?
Cash tied up in a deflating asset is just a stupid strategy in my opinion. Liquid cash in hand is the only cash that matters. Money you work for is money you invest. Paying a bond for the house you live in is NOT an investment. The nice thing about the rental I live in is I do what I want there anyway and I walk away whenever I feel like it (the owner is only to bloody happy to have a tenant like me). I'm happy to flog 30% cash of what the bond would be for rent and put the rest to work in real investments like shorting the crap out of the stock market. Sheesh, catch a wake up man and go do the sums! YIELD IS EVERYTHING!
look at Zimbabwe. Money is worth nothing. At least if you have a property you have something. Not good to have millions in your bank account if it is worth nothing. You are not going to be getting 10% in a money market account for long as interest rates are going to go down dramatically in south Africa (same as in Europe and USA)
There are some smart chaps here, so riddle me this, and forgive my ignorance. I studied English. What will happen to our currency and home prices if there is a massive and quick deflation of the rand? What happened to home prices in Zim when the currency crashed? With the price of bread in the hundred thousands and the billion note, what has happened to salaries?
Interesting excerpt from a financial blog today here in London,this could well be the situation in SA in two years time when Zuma bows to union pressure and slashes interest rates dramatically [which will happen in my humble opinion].You are just on a different place on the downward curve of the market.
UK house prices have much further to fall.
Prospective buyers must realise that interest rates are being held at artificially low levels. What happens to house prices when rates are forced up, as they inevitably will be? What then? What happens to all those who are on the brink now, but just surviving? What happens to those on tracker rates, who haven’t yet felt the crunch because their monthly repayments have fallen so low? What happens to first time buyers and buy-to-let landlords in a high-interest-rate environment? House prices remain out of kilter with what people earn. No matter what the government does, they will head lower until they reach a level which people can afford, which history has shown to be about three times earnings. And they will probably overshoot this to the downside because of the scale of the preceding boom and the oncoming bust. There is nothing anyone, not tycoon nor politician, can do to stop this inevitable course. All they can do is delay it.
What is happening in the UK WILL HAPPEN here. Price of properties will fall by 50% and the interest rates will fall too sharply. So any money people have in the bank now, will earn you almost nothing. Buy a property then? buy gold?
To Zim Anonymous...
You say:
"look at Zimbabwe. Money is worth nothing. At least if you have a property you have something. Not good to have millions in your bank account if it is worth nothing."
It all depends on what you mean by 'money'. The only real money is inflation resistant asset backed paper money (ie Gold standard) or else the asset itself such as AU, AG, or PT, in other words, real money has no counter party risk such as is a fact of life in fractional reserve banking and their thieving fiat currencies. Surely you don't think the contributors on this blog don't understand that? And, please, I'm NOT a Gold Bug!
On the (relative) 'value' of your house? If you think you have 'something' in that house, then good for you as we clearly don't view wealth, money and ownership in the same light. I do not view anything as an asset unless it's yield is ahead of that government engineered thieving regression curve called currency devaluation, a direct result of the effects of inflation which is a direct result of M6 supply (a bit of a simplistic explanation but there it is). You ever notice how Gov stats focus on M1 to max M3?
Right, so inflation is good nuh? You got your 400% price escalation in property sans the past decade? Ok, let's look at the last decade where I'd guess our annual inflation ranged between 4% to 13% (educated guess, I'm not going to go look it up now) but let's say averaged 8% over 10 years, cummulative 80% to keep things simple and easy to explain, but it's actually more). Let's say R1 was worth R1 a decade back. Now add 8% inflation (devaluation of currency) per year and you get, wait for it, R0.43 in year 10. Yes friend, that's what your 2009 R1 was worth in 1999.
ok, now keep the above in mind as PART 1 as we move on to the next insidious ingredient of the alchemy of your 'investment's' demise...
You say: You are not going to be getting 10% in a money market account for long as interest rates are going to go down dramatically in south Africa (same as in Europe and USA)
Oh boy are you right! I was using the MM as a simple example. Believe me, with inflation (currency devaluation) at 8% and an MM at 10% I wouldn't even consider such an option, let alone devalueing property that is overpriced in the same devalued currency and only yielding 5%.
Anyway, so you bought that 3 bed McMansion in 1999 for R400k and today it's estate agent reckoned selling price is R1.6 bars. Nice 400% equity growth on which you're going to pay CGT if you manage to sell nuh? I bet you revalued and borrowed right up to 1.3 or 1.4, maybe even 1.5 to do all those improvements etc? (Don't get me wrong, I did the same thing, flipped properties for 6 years and got out in 2005 when I saw the tide turning.)
Ok, here's the PART 2 of the alchemy of your wealth's demise in property. Even though that property is priced at 1.6 (and so's your CGT when you sell), if you inflation adjust (apply that devalued ZAR) then that 1.6 x 0.43 only has an adjusted value of R688,000... yes, I know it's counter-intuitive, but guess who is on the receiving end of devaluation? Take my word for it, the real value of your 1.6 bar property is equivalent to 688k in 1999. Now we have to tie this up with PART 3...
PART 3 is a bit more difficult to explain as it involves the human condition. You see, inflation is about money, while deflation is about fear. Let me explain:
1. Very, very few people in SA are earning bigger incomes today, in nominal terms, than they earned in 1999. The so called statistical growth in income is a statistical farce. The only growth came from an exponential increase in the middle to upper middle income segments, those who earn between 260k and 500k per annum.
2. The bloke who was earning 25k per month in 1999 is highly unlikely to be earning more than 40k per month today, in nominal terms. I don't need to prove this, just look at yourself if you're a salaried employee (even many self-employed blokes). That's a cummulative increase of around 60% which does sound good until you adjust for inflation...
3. Historically house prices should hover, at best, around 3 x annual earnings.
4. Average middle segment income is 300k per annum so average middle class home should be around 900k nuh? Uh oh, enter current interest rates, credit crisis, 10% deposit and tightened credit access.
5. Salary = 300k pa. That's 25k pm gross of which 30% max bond allows for monthly bond repayments of R7500. Will that repay a R900k bond? Will that repay a R900k bond even after a 10% deposit which I'm pretty sure most SAfricans don't have? Close, but that maxes our bond payer to the hilt because 30% of gross is a chunk of your after tax disposable income, a far too big chunk for most people even in good times... and here's the punchline next
5. Good times are over for a while, salaries are flat or declining, and it's going to stay that way for a lot longer than most people can stay solvent.
So to summarise:
PART1: A currency devalued by more than 50%
PART2: Nominal house prices at +400% since 1999
PART3: The property market is headed for life support, and 70% of bond applications are being declined, notwithstanding that people are still applying for bonds at 30% of gross.
With manufacturing down 11% last month, I'd say we're heading into a deep, deep recession. You want to hold onto a nominal 1.6 bar property that has an adjusted value of 688k, in a deflationary environment? Go right ahead, I'll keep renting at the same rent I've been paying for the past 6 years as in real terms my rent just keeps getting cheaper.
Deflation is a function of fear, when people look at an asset that's priced at 100 today and they say, I'll wait, because tomorrow I'll get it for 90.
Until sellers get it, they're just going to keep getting deeper and deeper into negative equity. Stop loss strategy is the golden rule in any investment. Why? because when you bottom and you're still in that investment that's lost 80% or 90% then you are locked in and you have no choice but to ride it out, and you miss out on the whole re inflation shebang.
And that my friend, is how people impoverish themselves, not by getting into debt, but by getting into the wrong debt at the wrong time.
There is a time and place for property debt and now is not it
To Joe, i have a question:
If your rent the place you live in, do you still have money to save? If so, where will you put it when you do not earn 10% interest anymore? Where do you think you should invest money in?
To Anon...
You ask: If your rent the place you live in, do you still have money to save?
I have a simple rule of thumb that I've followed all my life. I take the maximum bond I can get and I halve it. That's the maximum bond I'll apply for. That means that I will never commit more than 15% of my gross income to a bond repayment. After tax that comes to around 20%. Secondly, I look at a property and put the rental price next to the bond repayment. If the rental is less than 70% of the bond, it' a no-brainer. Since my rent is 30% of what the bond currently would be?...
You ask: If so, where will you put it when you do not earn 10% interest anymore?
I should never have mentioned the money market example. For some people the MM is ok at whatever % since it's frankly safer than houses. I only ever use it as a temporary 'parking lot'. As a trader, I'm not focussed on % at all. I have daily, weekly and monthly targets I work towards. Percentiles, like usury, is a con game. Linear math is a far better way. For example: Say you have 1 bar of cash to work with and you need 50k per month to live on but you also want to build your portfolio by 50k per month. That means you have to annualise your return by 120% (initially) which sounds impossible. However, when you use basic linear math it becomes easy. 100k per month is 10% of 1 bar or a daily target (20 wor days pm) of 5k (0.5%). Those big institutional funds out there? This is what they do with people's money; they leverage huge amounts for focussed short term targets and make 120% per annum while the 'investor' thinks a 20% annual cap is a HUGE return.
Believe me Anon, it's easy when you apply a disciplined risk/reward strategy and stick to money management first.
As to where I would put it? Well I would trade off the high risk of leveraged instruments for the returns.
You ask: Where do you think you should invest money in?
What I think is of no consequence. Each person's risk profile is different and anyway, I'm certainly not going to give anyone advice and I know nothing of your needs so frankly, whatever I say would probably be untrue for anyone but myself. I don't invest, I trade any instrument where I can remain absolutely liquid and get in and out of the trade at the click of a button.
Enough of this, we're off the topic. One day I will definitely get back into property, but that will only be when property prices again come inline with people's income. That means that either the property market comes down another 20% to 30% or the average Joe must earn a lot more. I don't think salaries are going to go up for a while though.
Thanks joe for your informative blogs
Anon? Do yourself a favour and read this article as it makes the case far better than I can. It explains one part of the broader underlying macro economic fundamentals that are truly going to make this time 'different'. I know this relates to the US but at least their stats attempt accuracy, unlike the clowns who do our local stats. You can bet your bottom line that the demographic influences on fundamentals described in this article are absolutely true for SA as well, in fact, more so when you look at the staggering disparities in our society.
This article basically puts forward the hypothesis that the average Joe is irretrievably broke because over the past decade inflation and speculation went wild while normal people's earnings remained flat or went negative. Joe had no choice but to borrow to the hilt just to stay even (and SAfrica is no different with +70% household debt). In the end something has to give, and with credit gone, I think very real deflation in credit dependent asset classes will be the norm for some years to come. People who think they have equity in property are in for a very rude awakening, and nothing will bring that reality front and centre quicker than a sudden cycle of interest rate decreases. Yes, bonds are now cheaper but the underlying causes of the decreases are going to wreck the economy and exponentially reduce consumer credit and buying power
Here's the article:
Fed Survey of Consumer Finances
I think this probably answers your questions in the best possible way
This is a great investment opportunity in your place.
Paula M
WOW!!
Very informative blog and thanks for sharing . I Have enjoyed reading and i will keep visiting...
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