Rent Vs Buy: Claremont - Can Only Be A Terrible Investment

Here's a 2 bed apartment in Claremont described which "can only be a fantastic investment", on the market for R1 495 000 and which has a net rental of R6 050 (R6 500 gross rental - R450 levies). That means with a 100% bond the difference between the bond payment (R19 093) and the net rental is R13 043, twice the net rental itself! Here's the payment and yield graph:

Paying all in cash gets you a 5% return on investment, about 5.5% below inflation. To break even on cashflow requires a hefty 68.3% downpayment (nearly a million Rand!) and even with a 50% downpayment you need 2.9% capital appreciation (which is going to be rare when every bank is forecasting price delcines) to not lose any money at all. The returns will be even less one rates, maintenance and vacancy are taken into account.

How To Chase The Market Down In Somerset West

Reader Bean Counter sent in the following email:

In July last year this place was on the market on for R1,950,000.

In December they dropped the asking to R1,850,000.

By February it had dropped to R1,790,000.

That's how it stayed for a couple of months, until lo and behold in April they thought, 'To hell with reality, we want value!' and RAISED their price to R1,800,000.

Well, pride comes before a fall, and this week, it's down to an all-time low of R1,720,000.

You'll notice that in over a year they've dropped their asking price R230 000 from R1.95 million to R1.72 million. That only works out to a price drop of 11.8%, which is below the 13.2% drop in median property prices that Standard Bank released. In other words they are chasing the market down: you're dropping prices but the market is dropping at a faster rate, a sure fire way to not sell a house.

Simons Town: Same House, Second Auction

If the first auction in March didn't meet the reserve price, then I'm sure auctioning it again in June when the market has deteriorated further will do the trick.

Lew Geffen: The Property Market Is Dead! Drop Prices 25%!

The following is a memo sent out by Lew Geffen (the head of Sotheby's Realty) to his agents and the media:

Recessionary Strategies - State of the market

As you know the recession is biting even deeper and strategies of 3 months ago are no longer relevant. The mere fact that the banks are requiring 25 % equity indicates strongly that they have factored that the market will drop another 25% on top of what the market has already come down i.e. plus, minus 15%.

To my mind that means that the market will come down 40% from the highs of last year which is hugely significant. Take into account that today a man who wants to purchase a R2 million property which is the average selling price in our company will have to earn in excess of R87 000 gross per month in order to qualify and if the market drops by 25% that same person will need to earn R65200 gross which is also no picnic.

There are 60% less buyers in the market than recorded at the same time last year. Attendances at showhouses are generally poor (Echoes of Sharpeville) and only when the Agent has convinced the seller to use the most aggressive parameters i.e. 40% below asking price, does the showhouse receive 10 couples or more leading to a subsequent sale. All the guns are loaded against us in this market and it will take your own courage and perspecuity in order to survive.

This morning I told a member of my own family to drop his price by 25% in order to get a quick sale and I would advise you to tell your clients the same. It's a question of being truthful to your clients to save them severe pain by procrastinating and not accepting the offer today. Today's low offer is tomorrow's miracle price. This market is not going to recover anytime soon.

The tough must get going!

Signed

LEW GEFFEN

Lew must have seen what is happening in the US with massive inventories building up and has decided to take preemptive action.

Standard Bank: Median Property Price Down 13.2% Y/Y - Dropped 8% In Two Months!

Back in April Standard Bank reported the median price drop was 5.5% year over year. Now they have reported that year over year the median has dropped 13.2% which means that in a little over two months the median price has dropped another 8%! That has got to hurt!

South African median house prices fell by 13.2% year-on-year in May, with new tougher credit laws and high interest rates cutting demand, a survey showed on Monday.

A median is the middle point between the highest and lowest figures.

Sponsors Standard Bank said the decline in prices may have been overstated by high base effects due to abnormally high activity during the same month last year, but the downward trend still showed declining affordability on high interest rates.

Observatory: Languishing Property And Dropping Asking Prices

The house pictured on the left in Observatory was on sale for R870 000 in November 2007. 7 months later it's still on sale and the price has dropped R50 000 to R820 000.

ABSA: Real Price Decline Of 4.5% In 2008

ABSA, who are the largest mortgage lender in SA, are predicting a 4.5% real price decline in house prices in 2008. Jacques Du Toit is quoted as saying that for next two years there will be no real growth:

He says investors in the housing market should not expect to achieve positive real capital appreciation during the next 24 months, but with an increase in demand for rental property, an acceptable income return may be achieved during this period.

The demand for rental property is an assumption that I would not bet on as there are a lot of specuvestor properties out there standing empty that are going to be dumped on the market when they no longer appreciate at 20%+ a year further dampening prices even further and putting negative pressure on rentals.

Rent Vs Buy: Vredehoek

This 1 bedroomed apartment in Vredehoek is on the market for R995 000 and is currently tenanted for R4 250. The ad states that the levies are R697 a month which means that net rental income is R3 553 a month. If one takes out a 100% bond the monthly payments are R13 102 per month, which means that the difference between the monthly payment and the rental income is R9 549 a month, nearly 2.7 times the net rental income itself! Here's the payment and yield graph:

Buying the apartment for cash yields a 4.29% return on investment, a good 6% below inflation. To break even on cashflow a massive 73% downpayment (over R725 000) is required, with a 50% downpayment still requiring 3.6% capital appreciation not to lose any money at all. Once rates, maintenance and vacancy are taken into account the yield is even less.

FNB: Expect "National House Price Deflation"

John Loos is FNB's property strategist and has been one of the biggest rah-rah property cheerleaders during the bubble run up over the past few years. When there were signs that property market was overvalued Loos was first in line to reassure us that everything was alright and property always goes up. Well according to this report in MoneyWeb ol' Johnny is a bit less optimistic these days

FNB's property strategist John Loos, who is known for his general optimism about South African real estate, is bracing himself for "some national house price deflation"

Producer Inflation Worsens To 12.4%

Producer Price Inflation (PPI) has worsened to 12.4%. It was expected to be 11.7%.

Producer price inflation (PPI) rose to 12.4 percent year on year in April, from March’s 11.9 percent rise according to Statistics South Africa.

The PPI rose 2.1% on a monthly basis after March’s monthly increase of 2.0%.

PPI was expected to be at 11.7% year-on-year, a survey by I-Net Bridge has found. Forecasts ranged widely from 11.0% year-on-year to 13.1% year-on-year.

Tito's looking at that big red button again...

Rent Vs Buy: Tokai - Cute Cottage, Crap Investment

Here's a 2 bedroomed cottage in Tokai on the market for R795 000 and currently tenanted at R3 800 a month. With a 100% bond the difference between the monthly bond payment (R10 468) and the rent is R6 668 a month, 1.75 X the rent. Here's the payment and yield graph:

So buying the place in cash gets you a 5.75% ROI, 5% below inflation. A 63% downpayment is required to break even on cash flow and even with a 50% downpayment 2.16% capital appreciation is required to not lose any money at all.

TITO GOES NUCLEAR! 2% RATE HIKE IN DISCUSSION!

Tito's hand is hovering over the big red nuke button at the Reserve Bank:

A huge interest rate shock awaits South Africans as the monetary authorities consider hiking rates by another 200 basis points.

Most economists have predicted rates only to increase - at most - by 100 basis points.

But South African Reserve Bank governor Tito Mboweni said on Wednesday that he and his colleagues had discussed the impact on the economy of raising the bank's official repo rate by 200 basis points.

Hiking rates 2% is going to take some cajones!

CPIX Continues To Climb

Consumer price inflation continues to climb. Business Day reports:

THE INCREASE in SA’s consumer price index excluding mortgage rate changes (CPIX) for metro and other areas, which is used by the South African Reserve Bank (SARB) for its inflation target, was up 10,4% year-on-year (y/y) in April from 10,1% y/y in March, Statistics South Africa (Stats SA) said today.
CPIX was up 1,6% month-on-month (m/m) after it increased 1.6% m/m in March. This is the thirteenth month running that CPIX has been above the 6% upper target limit.

Headline consumer prices - the 12-month rate of change in the consumer price index (CPI) for metropolitan areas - was up 11,1% y/y in April from a 10,6% y/y increase in March.

The core inflation rate, which excludes volatile foods, municipal rates and monetary policy changes, was up 10,2% y/y in April from 9,8% y/y in March.

A 50 base point rate hike is guaranteed now and the odds for further hikes after that are rising

Rent Vs Buy: Parklands - Lose Your Money And Your Mind

Here's a 2 bed duplex in Parklands (aka The Suburb That Destroys Souls) on the market for R689 000 which is tenanted at R3 300 a month. With a 100% bond the difference between the bond and the rent is 1.75 times the rent itself. Here's the yield and payment graph.




5.75% return on investment if you buy it in cash, which means you're only losing 5% (and rising) of your investment due to inflation every year. To break even on cash flow requires a 63% downpayment and even with a 50% downpayment you still require 2.15% capital appreciation to not lose any money. And that's before rates, levies, maintenance and vacancy so expect even worse returns

R4.5 Million To R2.5 Million

From the comments on our recent guest post The Real Cost Of Credit:

Regarding house prices dropping, I have been tracking a house in the Southern Suburbs of Cape Town originally listed at R4.5M, then dropped to R3.8M and now the agent is saying that the seller is very desperate due to having bought a second house and struggling to service two bonds ie possibly available at R2.5M?

Emergency Rate Hike On The Way!

Consumer Price Inflation Index numbers are going to be released next week and the growing concensus seems to be it's going to be pretty bad. Bad enough for an emergency rate hike:

Chief economist of Dynamic Wealth, professor Chris Harmse, says he will not be surprised if an emergency Monetary Policy Committee (MPC) meeting is called on Wednesday afternoon next week after CPIX inflation has been announced at worse-than-expected levels.

April CPI data is due for release at 11:30 on Wednesday and comes hot on the heels of a statement made recently by central bank governor Tito Mboweni that rates should go up again.

Prior to that talk it was inferred from an SABC interview with Mboweni that an emergency meeting may be on the cards as inflation was getting out of control.

Rent Vs Buy: Tyger Waterfront - "Great Investment" If You Defined Great As 6% Below Inflation

Following on from our previous post, the same seller is also selling this 1 bedroomed apartment also somewhere on the Tyger Waterfront for R680 000. This one is tenanted at R3 300 a month with rates and levies costing R1 020. That means rates and levies are eating almosta third of your monthly rental income, leaving a net rental income of R2 280 a month. Taking out a 100% bond means that the difference between the monthly bond payment (R8 954) and the net rental income is R6 674, 2.9 times the monthly rental income itself. That's approaching De Waterkant numbers! Here's the payment and yield graph:

This has worse numbers than the previous apartment. If you buy in cash you can look forward to a return on investment of a hair's breadth over 4%, as opposed to leaving your money in the bank where you can get anywhere from 9%-11%. Putting down 50% still requires 3.88% capital appreciation to not lose any money at all and to break even on cashflow requires a 74.5% downpayment (over a half a million rand). Rates and levies are taken into account but vacancy and maintenance are not. 4% a year ROI? I'll take two!!

Rent Vs Buy: Tyger Waterfront - "Buy a life style" because you aren't buying an investment

This 2 bed apartment in the Tyger Waterfront is on sale for R890 000 and has a "possible" rental of R4 000 a month (ie you might be getting less). Take away rates and levies of R687 and R234 a month and your net rental income is R3 077 a month, which means that the difference between the monthly bond payment (R11 719 a month) and the net rental is R8 642, which is nearly 2.8 times greater than the net rental itself! Here's the payment and yield graph:




So buying this "life style" will give you a 4.15% return on investment, nearly 6% below inflation. To break even on cashflow you need a whopping 73% downpayment (R656 325) and putting down 50% as a deposit still requires 3.15% capital appreciation to not lose any money at all! Rates and levies are taken into account but vacancy and maintenance are not.

The Real Cost Of Credit

The following is a guest post from reader BP

The Real Cost Of Credit

The real cost of credit needs to take into account earnings notably the after tax or disposable income. Interest rates are one thing - the level of indebtness is another! Current levels of debt to disposable income are about 80% - it used to be about 52% until about 3 years ago when it suddenly took off. Such easy credit fueled the property run. Property was never "cheap" in the first place - easy credit pushed it to dizzying heights. At the same time from mid-2003, we had an equity bull market. By all means the residential property market outpaced it - in cape town it did. Where would that be a normal occurence? It is an incredible exception - not to be repeated for a very long time.

As interest rates respond to inflation that is grinding down peoples spending power and hurting the poor, people are crying about high interest rates. Did they never conceive that interest rates could increase from multi-decade lows? Or was it different this time - as told by the knowledgeable estate agents! And inflation will rise further as will prime. bets are on for a definite 50 points next month and a 60% chance of another 50 points in August! Prime at 16%. Not too high?

Consider the following 2 useful indicators:

1) The cost of debt-servicing as a percentage of Income. Current debt to disposable income is 80% and interest rates are 15% (15.55 next month). that means that the real cost of servicing is the product of these 2 or 12% (12.4% next month). Not too high? Consider the crisis of 1998 - debt to disposable income was 52% and prime hit 25.5% making the cost of servicing 13.26%. sure it only stayed there for a short time but it did d damage. We are currently not too far off that now. Prime at 16.5% equates to this punitive figure (16.5% * 80% approximates 25.5% *52%). BUT even so it is not only the level that counts but how high it stays up there! In effect, looking at a graph, it is not the curve that is important but the area under it (the integration of the curve for the mathematically minded). And with inflation set to rise further bet on it staying up there longer.

2) The penalty for borrowing money is actually the real cost of a loan, simply the difference between inflation and the prime rate. Currently it is 4.4% (15% - 10.6%) which by historical standards is really low - the average over the last 15 years is about 7%. so another 1.5% - 2% increase in prime is not impossible to equate to the average.

These two indicators indicate one thing: interest rates will increase in the near term and will rise further before they can be considered as "punitive".

A last comment on inflation. With commodity prices staying high (as per the CRB index of overall commodities), inflation has to feed through. It has already started in food and fuel. Wait for cars, clothing, furniture, and so on. and even though the economy stagnates, if inflation is rising the Reserve Bank HAS to raise rates. In the past, this is what Central banks have done. Such "stagflation" (economic stagnation and inflation rising) portent very hard times. Remember the "sour 70's" where a series of crises and market reversals ruined fixed asset values. They can easily arise again. My view is that they are which is why all my money is in cash products.

Business Report: Property industry faces tougher times

Property industry faces tougher times

The sharp slowdown in residential property sales volumes is leading to estate agents leaving the industry, and industry players expect things to get worse this year.

Steve van Wyk, the principal of Seeff Properties office in Centurion, said last week his office now had 42 agents, compared with 53 a year ago.

It's estimated the number of estate agents in South Africa could more than halve in number, going from 77 000 - 80 000 at it's peak to 36 000.

Rent Vs Buy: Cape Town CBD

This apartment in Strand Street in the CBD is for sale for a cool R1 million and is tenanted (till the end of May) for R3 800 a month. That means with a 100% bond the difference between the monthly bond payment (R13 167) and the rent is R9 367 a month, nearly 2.5 times the rental itself! Here's the payment and yield graph:

Ouch! Buying the place in cash gets you a 4.56% annual return on investment, about 5% less than just leaving your money in the bank. Just to break even on cashflow you need a massive 71% downpayment! Even putting down 50% of the purchase price requires over 3% capital appreciation just to not lose any money at all! And this is before costs such as rates, levies, maintenance and vacancy are taken into account.

Rent Vs Buy: Hout Bay - Invest 3.8 Million And Make No Money

This isn't a proper rent vs buy because I would never advocate someone to rent a 3 bedroomed townhouse for R28 500 a month. That being said it's a helluva lot better than paying R79 000 a month to cover the bond on the R6 000 000 asking price. If you were stupid enough to buy this place with a 100% bond then you'd be losing R50 000 every month trying to cover the shortfall! Here's the payment and yield graph:

So if you paid the whopping R6 000 000 asking price you'd end up with a 5.7% return on investment, probably 5% less than the rate of inflation in South Africa. Just to break even on cash flow you need a massive deposit of R3.8 million! I repeat: to make no money at all you need to put down nearly four million Rand. If you had say put that R3.8 million in a money market account paying 10% you'd at least be making R380 000 a year. Even with a 50% deposit you still require 2.2% capital appreciation to not lose any money at all.

And of course there's the fact that we have not taken into account rates (about to go up), levies (which will be considerable for a security estate in Hout Bay) maintenance and vacancy.

Rent Vs Buy: Gardens - "be hip and not square" and lose R60 000

Here's a one bedroomed apartment in Gardens on sale for R1 100 000. How much rent does it pull in? R4 000 a month. With a 100% bond your monthly repayments will be R14 484, which means that the difference between the bond repayments and the rent (R10 484) is over 2.5 times more than the rental income itself! Here's the payment and yield graph:





Paying for it in cash gets you a retun on investment of 4.36%, only 6% less than inflation. You need a 72% downpayment (R800 000) to break even on cash flow and even if you put down a 50% downpayment you still need 3.54% capital appreciation not to lose any money at all. Considering that the tenant is in till December and prices are not moving, if you bought today then you'll have lost R60 000 by then.

Reserve Bank: Inflations Going To Get Worse - Prepare For More Rate Hikes

SARB: Inflation outlook deteriorates

The South African Reserve Bank said on Tuesday inflation was expected to rise, but that it remained committed to bringing the gauge within target range "over a reasonable time horizon".

The targeted CPIX consumer inflation gauge has persisted above the top end of a 3% to 6% range since April 2007, and accelerated to a new five-year high of 10,1% year-on-year in March.

"The inflation outlook has deteriorated since the publication of the previous monetary policy review in November 2007," the central bank said in a twice-yearly monetary policy review.

Developers In Trouble And How To Lose R94 000 Without Trying

Here's an ad from a developer who seems to be in some trouble, selling some houses in the Strand for R435 000:

Brand new three bedroom homes with a single garage and garden, situated two blocks from the beach, in strand !!!
REDUCED FROM R529 000.
The builder has 3 houses that he needs to sell fast!

This is in a complex of seven houses so there are three houses still available. Which means that if the four existing owners bought at R529 000 they just took a R94 000 haircut and as interest rates increase they will be paying more and more for an asset declining in value. Should any of those owners decide they wish to sell they'll be competing against the developer who can afford to cut prices further.

Selling owners versus developers is going to become a more common occurrence. Developments like The Rockwell (a personal favourite of ours) still has as of 30 April 2008 twenty units for sale direct from the developer, that is when they aren't trying to rent them out. Who do you think has more room to negotiate prices? The developer or people trying to resale their "investment" apartment?

Rent Vs Buy: Stellenbosch

Here's a 3 bed house in a security complex in Stellenbosch on the market for R1 395 000 and which is currently rented out till November for R6 000 a month. With a 100% bond the monthly bond repayment will be R17 974 a month nearly R12 000 a month more than the going rent. Here's the payment and yield graph:



Buying in cash gets you a return on investment of 5.27% with 2.63% capital appreciation required just to not lose any money. Cash flow breaks even with a 66% downpayment, nearly R900 000! And these figures are overstated as rates, levies, maintenance and vacancy have not been taken into account.

Rent Vs Buy: Green Point - Since When Is 5% Yield A Selling Point?

This apartment in Green Point is on sale for R1 895 000 (and on auction soon afterwards) with a tenant in till March 2009 paying R8 500 a month. I love how the ad puts 5% yield right in the ad title, as if a return on investment 5% below inflation is a good thing. With a 100% bond the difference between the rent and the bond payments is just under twice the rental itself. Here's the payment and yield graph:


5.38% ROI when you buy in cash with 2.52% capital appreciation required with 50% down not to lose any money at all. To be cash flow positive you need to put down a whopping R1 250 000 (65%). Not exactly a "great investment/great buy" is it?

Rent Vs Buy: Blouberg - "Expected" excellent buy

Here's a (by the looks of it) newly completed 2 bedroom apartment in Blouberg on sale for R1 095 000 with an "expected" gross rental of R5 000 a month. With a 100% bond the difference between the bond payments and the rent is almost double the rental itself. Here's the payment and yield graph:






So less than 5.5% return on investment if you pay in cash and 65% downpayment required to break even on cash flow. Even with a 50% downpayment (over R500 000) you still need close to 2.5% capital appreciation required not to lose any money.

Rent Vs Buy: City Bowl

Here's a 2 bed victorian cottage in the City Bowl on sale for R1 350 000 which will attain a rent from R6 600 from June, so I estimate it gets about R6 000 now. With a full bond the difference between the rent and the bond payment is a touch under double the rental alone. Here's the income and yield graph:

All in all pretty bad. Sub 6% return on investment with 62% downpayment required to break even on cash flow. With a 50% downpayment you still need 2% capital appreciation to not lose any money at all.

Inflation Breaks 10%

CPIX at double digits as era of low inflation ends

INFLATION rocketed by more than 10% last month, scaling a new five-year peak that was well above expectations and encouraging speculation the Reserve Bank will raise interest rates at its next policy meeting in June.
The annual rise in CPIX, SA’s main inflation gauge, speeded up to 10,1% from 9,4% in February — its highest since December 2002, data from Statistics SA showed yesterday.

The next rate hike is guaranteed. I suspect the odds for two more after that are greatly increased.

Three More Rate Hikes Before The End Of The Year?

It is possible.

There is a 70% chance of another 50 basis points interest rate adjustment, taking prime to 15.5%, and an even chance of two additional hikes before year-end, according to senior economist from Credit Guarantee Insurance Corporation, Luke Doig.

"Most confidence surveys paint a bleak picture, while expectations don't indicate any imminent recovery," he says.

Rent Vs Buy: Rosebank

This "cute" victorian cottage in Rosebank is on sale for R849 000 with a gross rental of R4 000 a month. With a 100% bond the difference between the rent and the bond payments is just under twice the cost of the rent itself. Here's the payment and yield graph.

Paying for it in cash gives you a 5.65% return on investment, with 64% required just to break even on cash flow. Even with a 50% downpayment you need 2.25% capital appreciation just to not lose any money. The actual returns will be lower once levies, rates, maintenance and vacancy costs are taken into account. But you do "save" R17 000 because the transfer duty is included in the price, which is barely 2 1/2 months shortfall if you buy it with no money down.

The Estate Agent Cull Begins

Waaaay back in September 2006 we linked to a story that indicated that were double as many agents in SA as there needs to be. Despite having 77 000 - 80 000 Neville McIntyre, chief executive of Jigsaw Holdings (which includes estate agencies Aida and Realty) said the market can only really support 36 000.

Today in Business Day Herschel Jawitz, CE of Jawitz Properties states he believes there will only be a decline in about 10 000 - 15 000 agents. However Lew Geffen of Sotheby's International Realty repeated Neville McIntyre's conclusion:

I think by year end there will only be about 36000 estate agents

Investors Exit The Market

I think we'll start seeing a lot more ads like this one. Here's an ad from an investor unloading his entire portfolio of 18 properties all over the Cape ("Noordhoek to Grabouw") for R7 000 000. The properties have a "potential rental" of R46 000 a month, which either means they are currently renting for less than that or some properties are sitting vacant. According to my calculations if you achieve that "potential rental" and you want to be cash flow positive you'll need to put down at least R3 500 000. It must be a great feeling 'investing' R3 500 000 and not actually making any money. I also doubt that R46 000 rental includes rates, levies and other ownership costs.

This 2 bed apartments in Noordhoek seems to be one of the apartments they're trying to sell off. It's for sale for R615 000 and has a gross rental of R3 000. Here's the yield and payment graph.

Paying in cash yields a 5.85% return on investment, with a 63% downpayment needed to break even on cash flow. Just to not lose any money at all with a 50% downpayment requires just over 2% capital appreciation. Again this is before rates, levies, maintenance and vacancy costs.

Rent Vs Buy: Observatory - "Excellent Investments" Yield 3% Below Inflation?

Here's an "excellent investment" bachelor pad in Observatory on the market for R570 000 with a rental of R2 800. With a full bond the difference between the rent and the monthly payments is just
over 1.5 times the rent itself. Here's the yield and payment graph:

Before rates, levies, maintenance and vacancy costs are taken into account purchasing the place for cash gets you a mere 5.89% about 3% below official inflation numbers. A 62% downpayment is required to break even on cash flow and even with 50% downpayment 2% capital appreciation is required to not lose any money at all.

Rent Vs Buy: Gardens - With New Interest Rates

Here's the first Rent Vs Buy using the new prime interest rates at 15%. We have a 41m^2 one bed apartment in Gardens for sale for R675 000 with a net rental of R2 426 per month (R3 500 gross - R1 074 in rates and levies, ouch!). That means with a full bond the difference between the net rental and the monthly payment is 2.6 times the rent itself! Here's the yield and payment graph:

Buying for cash gets you a 4.31% return on investment with a 72.7% downpayment required to break even on cash flow. Putting down a 50% downpayment requires 3.59% capital appreciation just to not lose any money at all.

More Rate Hikes To Come

Rate hikes: Expect more

After what we heard today, I am still expecting another rate hike in June or August, given the way Mboweni was talking how the Bank has reacted to the electricity price increases, and how we can see inflation into double digits.

I won't be surprised to see another hike in June.

Reserve Bank Hikes Repo Rate 50 Points

Mboweni hikes rates as inflation risks remain

The South African Reserve Bank's (Sarb) Monetary Policy Committee (MPC) ended its two-day meeting on Thursday by announcing it would hike the repo rate by 50 basis points, bringing the rate at which it lends to banks to 11.5 percent.

In line with new policy, the repo decision was announced first as opposed to at the end of the statement.

Commercial banks prime overdraft rates will almost certainly rise by 0.5 percent to 15 percent from the current 14.5 percent.

I think we might see further rates hikes this year.

Agents Start To Panic: Round 2 - Observatory

The amount of inventory sitting on agents books must be piling up because I received the following email detailing agents putting pressure on sellers to lower prices in Observatory, which ironically enough is supposed to already be one of the more affordable areas in Cape Town:

During the past week, we contacted all the owners of property on the market in Observatory and asked them to reduce their asking prices in an attempt to make house prices more affordable. Below is the result of our efforts:

87 ARNOLD STREET: REDUCED FROM R780 000 TO R750 000. An immaculate lock-up-and-go property with low maintanace. Two huge bedrooms with built-in cupboards here, an open plan lounge that overlooks the back garden, a fitted kitchen and pleasant bathroom.

17 IRWELL STREET: REDUCED FROM R845 000 TO R795 000. Two bedrooms, two bathrooms and an outside room with a w/c and basin in this sunny home in a tree-lined street.

6 ROBINS ROAD: REDUCED FROM R915 000 TO R865 000. Modernized Victorian home in excellent condition. Two bedrooms with open plan living between the kitchen, lounge and private courtyard.

31 LOWER COLLINGWOOD ROAD: REDUCED FROM R1 100 000 TO R995 000. Freestanding home with three bedrooms, two bathrooms, a study and large garden. Secure parking too, in a quiet position close to the greenbelt area by the Liesbeek River.

22b. ASH STREET: REDUCED FROM R1 150 000 TO R1 100 000. Most unusual home with two bedrooms and a big and private garden and a separate self-contained wooden house hiding in one corner of the property. Secure parking too.

The largest drop was 9.5% (from R1 100 000 to R995 000) the smallest 3.8% (R780 000 to R750 000).

Rent Vs Buy: City Bowl - An Albatross For Years To Come

Here's a 2 bedroomed apartment in the City Bowl on the market for R1 195 000 with a rental of R5200 a month and tenanted till December 2008. Described as a "Good investment for years to come." The difference between the rent and the bond payment is just under twice the rental. Here's the yield and payment graph.
Sub 6% returns if you buy it for cash witha 66% downpayment required to break even on cash flow and 2.46% capital appreciation required even if you put down a 50% deposit and of course these numbers will be lower once rates, maintenance and vacancy costs are taken into account. But hey you've got a tenant locked in till December! The sucker!

Rent Vs Buy: Hermanus - Let's Be Realistic

Here's a house in Hermanus on sale for R1 800 000. It rents for R5 000 and has a cottage on the property that produces another R2 500 a month in rent for a grand total of R7 500 a month in rent. The house was previously listed for R1 990 000 but the seller chopped R190 000 (almost 10%) off the price to 'be realistic'. That being said if you took out a full bond the difference between the rent and the bond is double the rental itself. Here's the income yield and payment graph.
So paying for the place in cash gets you a dismal 5% return on investment (about half current inflation). You're cash flow positive with 67% downpayment (well over R1 million) and even with a 50% downpayment you need 2.68% capital appreciation to not lose any money at all. And once again that's before rates, maintenance (which will be considerable on a property this size) and vacancy costs.

Going Up And Coming Down Aren't Equal

I've often heard people make the comments that "if property prices drop 20% it doesn't matter because they've appreciated 40% so I still have 20% appreciation". That assumption is incorrect. For example let's say your house had a starting price of R1 000 000 and a appreciated 40% to R1 400 000. A 20% depreciation will reduce the price to R1 120 000, not R1 200 000, which is only a 12% appreciation. The following graph illustrates this:
The green line is what people expect to happen - x appreciates by 20% and then depreciates by 20% to come back to x - the red line is what actually is required - x appreciates by 20% and then only has to depreciate by 16% to go back to x.

So when Standard Bank says that the median price has depreciated 5%, this means that in fact that 5.25% of appreciation is wiped out. Larger drops wipe out even more - 10% depreciation wipes out 11% appreciation, 20% depreciation wipes out 25% appreciation and 30% depreciation wipes out 42% appreciation.

Estate Agents Start To Panic

The 70 000 estate agents in SA (about 30 000 too many) are starting to panic as the property market in SA goes over a cliff. Sellers have become accustomed to high prices but as the market deteriorates agents who are desperate to make a commission (for some their only commission of the year so far) are urging them to consider every offer. From RealEstateWeb:

Reject today's offer at your peril - agents

Greedy, stubborn sellers will regret holding out for a higher price. That's the message from a number of estate agency bosses, as residential market volumes drop off dramatically.

The latest to issue such a warning is Lew Geffen, chairman of Sotheby's International Realty SA, who believes the residential property market is much worse than recent figures from Absa suggest.

Geffen goes on to say that last year's prices are now unobtainable. With every bank predicting further weakening in the market how long before Geffen starts begging sellers to forget about 2006 prices? And then 2005 prices?

Rent Vs Buy: Belville - The Low End Doesn't Produce High Yields

Bank economists and real estate agents continue to claim that despite the slowdown in the market the low end of the market is where all the money is being made. Here's a 2 bed flat in Belville, an 'Excellent investment' on sale for R580 000 which rents for R2 800 a month. With a 100% bond the difference between the rent and the bond (R4623) is about 1.65 times the rent, which while not great is one of the better numbers we've seen. Here's the yield and payment graph:



A 5.79% max return on investment, and that's before rates, maintenance and vacancy costs, isn't great. With a 50% downpayment you need 1.9% capital appreciation to not lose any money and break even on cash flow is at 62% downpayment.

Rent Vs Buy: Cape Town CBD X 2

Here are two apartments for sale in the city bowl I noticed. The first is 41m^2 one bed apartment in Gardens on sale for R675 000. It has a net rental of R2 600 (R3 500 minus R900 in rates and levies) which means that the difference between the bond payment and the rent is more than twice the rental itself. Here's the yield and payment graph:

Paying in cash you get a pitiful 4.62% return on investment. To break even on cash flow requires a 70% downpayment and with a 50% downpayment the capital appreciation needs to be just over 3% to prevent you losing money.

The second property isn't much better. It's a 42m^2 one bed on sale at the Four Seasons (a specuvestor favourite) for a whopping R829 000 (that's about R20 000/m^2!) with a net rental of R3 300 (R4 000 minus R700 in levies). Here's it's yield and payment graph:

A 4.8% return on investment if you pay in cash, which is about half the inflation rate. Break even on cash flow with a 70% downpayment and 2.9% capital appreciation required to not lose any money even with a 50% downpayment.

Rent Vs Buy: Muizenberg - Potential For Low Yields

We're on a bit of a Muizenberg kick today. Here's a 1 bed apartment for sale for R900 000 with a 'rental income potential' of R3 500 a month. The difference between the rent and the bond payment is over two times the rent itself if you took out a full bond. Here's the income yield and payment graph:

So if you buy the place in cash you can expect a 4.67% return on income, about 5% below inflation. With a 50% downpayment the property still has to appreciate 3% to prevent you from losing money and breaking even on cash flow is only possible with a 70% downpayment. Yields would be even less if you took into account rates, levies, maintenance and vacancy costs.

Rent Vs Buy: Muizenberg - 15% Is In The Bag

Here's a 1 bed(?) apartment in Muizenberg is on sale for R795 000 and 'may command a rental upwards of R3 000' (or it may not). Levies are R630/month bringing the net rental to R2 370. Which means that on a 100% bond the difference between the rent and the bond is 3.3 times the bond itself. That means some horrible rental yields but never fear because according to the ad it has an '...estimated growth rate 10-15% pa'. I guess someone hasn't been paying attention to the news? Here's the payment and yield graphs:



So if you pay in cash you van expect a 3.58% return on investment. With a 50% downpayment the property has to appreciate by 4.4% just to not lose any money at all. a 76% downpayment is require d to break even on cashflow.

Muizenberg: Villa D'Algarve Is Full Of Specuvestors

Villa D'Algarve is a recently completed development in Muizenberg and, as expected in a new development, it's full of specuvestors trying to sell the properties they bought off plan and had no intention of ever living in. Here's three recent ones I found on Gumtree:

• 3 Bed Unit - R835 000


• 2 X 3 Bed Unit - R795 000/R849 000 (Most hilarious part of the ad, the title "My Beautiful Lady. I will miss you". Like they ever spent an actual night there!)


• 3 Bed Unit - R865 000

Rent Vs Buy: Cape Town CBD - What You Lose In Rent You'll Save In Petrol

Here's an apartment in the Cape Town CBD on sale for a cool R1 000 000. I'm not sure how many bedrooms it has but when you consider it rents for R3 800 a month I guess it only has one. If you took out a 100% bond the difference between the rent and the monthly bond repayment is 2.36 times the rent itself. Here's the yield and payment graph (RIP Tables. You served us well but we're moving into the 21st century here and the future is visual!)


So a 70% downpayment is required to break even on cashflow, and with a 50% downpayment you still need 3.12% capital appreciation to not lose any money at all. If you do plonk down a bar to buy the place outright you can look forward to a 4.56% annual return on investment. That's only 4% below inflation (well the official numbers at least). And of course there's the tiny fact that this excludes rates, levies, maintenance and vacancy costs.

Property Prices Drop

Folks. This ain't no April fool. It's official. Moneyweb reports that South African house prices fell for the first time in 8 years. According to Standard Bank house price growth -5.2% from March last year.