Woodstock: Asking Prices Drop - Down R50 000 in 5 Months

This 2 bedroom flat in Woodstock is for sale for R830 000. Back in March it was on sale for R880 000. Perhaps it is better to sell without a tenant...

Expect A Rate Hike In August

Credit uptick boosts case for rate hike

GROWTH in demand for credit by the private sector quickened in the year to June, data showed today, undermining the case for interest rates to be left on hold next month.

The Reserve Bank has increased rates by a total of 500 basis points since June 2006, partly to curb credit-driven consumer demand that was adding to inflationary pressure.

Discussion Thread: Income Vs Property Values - Is 3.5X Income Sufficient?

Following this comment in our Saturday Open Thread, longtime reader Bean Counter sent the following email:

Someone on your site asked a question about property values in relation to income. For some reason in this country nobody has heard of the old yardstick that "healthily" priced properties are about 3.5 times the average annual income.

Obviously this yardstick is problematic in SA. I know Thabo Mbeki's "two economies" theory has taken extreme flak, but the fact remains that we've got maybe 250,000 people who earn more than R400,000 per year, then another 3 or 4 million who earn perhaps R100,000 p.a., 20 million who earn between R40k and R90k, and finally 20 million who live on under $2 a day, or under R6,000 per year.

So the question is this: when we look at 3.5 times earnings, which group are we looking at? I don't think we should look at the top group, because they top end of the market is always in Cloud
Cuckooland, whichever country it happens to be. I'm sure you could still fork out two or three million US dollars on mansions in disaster zones like Liberia and Zimbabwe. Not that you'd want to, but it just shows that property prices in the top end of the market have no
correlation to the overall health or stability of a country. Just because Pam Golding sells a chunk of Clifton for R20 million, it doesn't mean prices in Durbanville aren't crashing...

This suggests to me that we're left with two core property-buying groups in SA: the R100k crowd, and the much larger R40-90k crowd. Two economies, and therefore two markets.

Does this mean that we should be looking at average 3-bed houses / 2-bed flats in all but elite suburbs to average R350,000?

Likewise do your township/lower working class suburban houses need to average R210,000 before they're healthily priced?

It seems logical, but it's still a little shocking: if Absa says the average price is somewhere in the 900k's, does that mean we've still got to undergo a 60% drop to get to R350,000?

Wow.

Or is the 3.5 rule only really applicable in stable, more equal societies?

Sellers Aren't Distressed, They're Despairing

Desperation that translates into a bargain

DESPERATE sellers of residential property were described as “distressed” this week by Rael Levitt, CEO of The Alliance Group. “Despairing” may be closer to the mark.
...
One estate agent trying to flog an immaculate two-bedroomed flat in a dodgy part of town informed us when we entered that the owners were asking for R650000. As we left without showing any hint of putting in an offer, she brought the price down to R540000. She called me the following day to say the owners might accept R450000.

I wouldn't be suprised if they accepted less than that in the end.

Saturday Open Thread

Time for our weekly Saturday open thread. If you've got anything you want to discuss about housing and real estate in Cape Town and South Africa, this is the place.

Our Favourite Simon's Town Foreclosure Still Isn't Selling

It's been a month since we last saw our favourite Simon's Town McMansion is still on the market for R3.6 million. Someone please buy it already and put it's owners (and the bank) out of their misery.

Nedbank Kills R1.6 Billion Property Development

Thanks to reader TA for the link. This may be in Sandton but it's indicative of what's going to happen to developments that have not yet started, or even those that have. And also I would guess so much for the top end of the market being strong.

Nedbank axes R1.6bn development

Some of SA’s richest business executives and families have been refunded between R3-million and R25-million for apartments they bought in one of Johannesburg’s priciest residential developments.

Billed as Sandton’s most sought- after address, apartments at La Residence in Sandton were priced at R40000/m² — off plan.

But banking group Nedbank yesterday confirmed that plans for the R1.6-billion project had been shelved.

...

Reynolds said this week that recent changes in the residential property market since the launch of the development, with prices falling, had required the financial institution rethink.

Rent Vs Buy: De Waterkant - Opportunity is Calling You... To Lose A Lot Of Cash

And speaking of the De Waterkant, this ad describes a dual level apartment/house (I can't tell) in De Waterkant on the market for a modest R9 250 000. If you wanted to you could sectionalise it into four units (which sounds like a helluva tight squeeze) and then rent then out for what the agent estimates could be +- R40 000/month. That means on a 100% bond you would be paying a killer R125 233 a month, and the difference between that and the rental income is R85 233 a month, over two times the total rental income. We've seen worse for De Waterkant though. Here's the income and yield graphs:

Paying the full asking price of R9.25 million will net you a pretty dismal 5.19% return on investment. To just break even on cash flow, that is to make no money at all, requires a deposit of 68%, over R6.2 million!!! Even with a 50% deposit of over R4 500 000 you still need just under 3.3% capital appreciation to not lose money at all.

And after costs such as rates, levies, maintenance and vacancy are taken into account, returns will be even less.

Rent Vs Buy: Gardens - R850 00 Invested = R0 Returned

This 2 bedroomed apartment in Gardens (Thanks to reader GH for the link) is on the market for R1 100 000 and is rented out till the end of August for R4 200/month. Once you take off R389 for rates and R454 for levies then the net rental income is reduced to R3 357/month. Which means that on a 100% bond you'll be paying R14 892 a month and the difference between that and the rental income is a whopping R11 535/month, 3.4 times the rental itself! That's approaching De Waterkant levels of moneylosingness (see I just made up a new word). Here's the income and yield graph, and believe me it ain't pretty:

It's hard to read off the graph but if you bought the place in cash you can expect a handsome return on investment of 3.66%, which is about 7% below the current levels of inflation and about 8-10% below of what you could expect your money to earn in a decent fixed deposit. Even worse to just break even on cash flow you need to plonk down a massive 77.46% deposit, over R850 000! Putting down a 50% downpayment still requires 4.46% capital appreciation to still be able to sell this turkey at break even.

But folks the ad says "Affordable" so you know it's good deal. Why rent when you can buy at four times the monthly cost?

Stellenbosch: The New De Waterkant?

This is a puzzling ad. Here's a 42 m^2 1 bedroomed apartment in Stellenbosch on the market for a mindblowing R1 080 000 which is just over R25 000/m^2. I think there are properties in De Waterkant going for less per m^2. Anyway here's what just over a bar will get you:

Stunning. Definitely worth the R15 000 a month bond payment. I do love this line in the ad though:

Total piece of mind for your student child

Well if you're prepared to spend a cool million on total piece of mind for your student child why not just send them to Harvard?

Rent Vs Buy: Green Point - So Much For The "World Cup Effect"

The World Cup stadium is being built in Green Point (right across the road judging from the pictures in this ad) so that means high demand and massive yields right? Well... now. Here's a bachelor flat in Green Point on sale for R705 000 and tenanted for 12 months at R3 500 a month. With a 100% bond you'll be paying R9 544 a month on the bond and the difference between that and the rent is R6 044, 1.7 times the rent itself. Here's the income and yield graph:

Buying the apartment for cash at the asking parice gets you a 5.96% return on investment, probably about 5% below inflation. A 63.33% downpayment (R446 483) is required just to break even on cash flow and with a 50% deposit you still need 2.17% capital appreciation to not lose any money at all.

Rent Vs Buy: Milnerton - New Suckers Required

Here's a 2 bed apartment in Milnerton that needs a "new landlord". It's priced at R830 000 and has a gross rental of R4 200, but once rates and levies are taken into account (R234 and R789) the net rental is R3 227. Which means that with a 100% bond you'll be paying R11 237 a month for a bond and the difference between that and the net rental is a hair over R8 000 a month; nearly 2.5 times the rental itself! Here's the income and yield graph:

Putting down the entire asking price nets you a 4.67% ROI. I think I've seen checking accounts with competitive returns on investment. A 71.28% deposit is required to break even on cashflow alone.

One Property, Two Prices: Milnerton Ridge

550 m^2 Milnerton Ridge Plot - R685 000
550 m^2 Milnerton Ridge Plot - R650 000

Rent Vs Buy: Rondebosch East - And Your Bank Balance Goes South

Here's a 3 bed house in Rondebosch East on sale for R1 390 000 with a current rental of R6 000 a month. With a 100% bond you'll only be losing just under R13 000 a month. The difference between the bond and the rent is over two times the rental income itself!




So buying the property for cash will get you a 5.18% return on investment. A 68% downpayment (nearly R950 000!) is needed to just break even on cash flow. Even with a 50% downpayment a 2.94% appreciation in capital is required to not lose any money at all.

Open Thread: Best Suburb In Cape Town?

If we had the cash (and even if the market bombs I still don't think we could afford it) we'd pack up our bags for Upper Fernwood.

Open Thread: Worst Suburb In Cape Town?

You know our choice, it's Parklands and surrounds by a mile. What's yours?

Open Thread: SA Cities

How is the property market doing in Johannesburg, Durban, Bloemfontein and other cities around the country?

Open Thread: The UK And The EU

The UK and EU have traditionally been strong economic partners of South Africa? Will the market troubles there exacerbate any issues in South Africa?

Open Thread: The USA

How will the economic downturn in the US affect SA? Will SA follow the same path as the US?

And to all the yanks reading: Happy 4th July!

Open Thread: Politics

How will the political landscape affect the housing market in South Africa. Will a Zuma presidency help or hinder the market? And how will the crisis in Zimbabwe further affect South Africa's economy?

Open Thread: Inflation

What do you think inflation will peak at? Some economists believe it will go as high as 13%. Do you think the Reserve Bank will be able to bring it under control? What other measures besides inflation targeting could be used?

Producer Price Inflation Hits 16.4%

Well that break didn't last long did it? Anyway it seems that producer price inflation just hit 16.4% which was way outside of any economists predictions. Another rate hike (or two) are a lock in.

And this is the last post till 25th July... Promise.

Mid Year Break

It's time for the annual July mid year break here at Cape Town Property Bubble HQ. We'll be back on the 25th of July. Consider this an open thread so if you have any interesting stories post them in the comments below.

CPIX Up Again - Expect Another Rate Hike

The Consumer Price Inflation Index is up again, further strengthening the chaces of another repo rate hike by the Reserve Bank

CPIX up 10.9 percent

SA’s consumer price index excluding mortgage rate changes (CPIX) for metro and other areas rose by 10.9% year-on-year in May, from the 10.4% year-on-year increase registered in April, according to Statistics South Africa.

CPIX was up 1.1% month-on-month after it increased 1.6% month-on-month in April.

This is the fourteenth month running that CPIX has been above the 6% upper target limit.

When The Second Auction Fails...

After two failed auctions perhaps the R3.6 million asking price on this Simon's Town McMansion, which I assume is the reserve price at the auctions, might be a bit high. I remember when ads proclaimed this place as having a 'market value' of R7.5 million and the asking price was R4.5 million. Now it's 'market value' is not even R3.6 million. It's still listed for R3.95 million at the realtor's site.

REMAX Inventory Report

Reader Bean Counter sends in a report on the inventory at REMAX every now and then. Here he is for June:

Crunched the numbers on the Remax site, and once again a big jump since last month: 309 more properties on the market, taking the total number for the Cape metro area to 5,578.

To refresh your memory, when I first did a stock-take in August last year, that number was 2,842.

Specific hotspots where sharp increases in unsold stock happened this month where:

Hout Bay - 69% (small numbers, from 13 to 22, but still significant)
Bloubergrand - 18.8%
Milnerton - 18.7%
Somerset West - 14%
Sea Point - 8.6%

The northern suburbs and False Bay coast are still damming up like mad - that's where the dam wall is going to crack first - but I think it's also very significant that Hout Bay and Sea Point are starting to pile up too. That's expensive real estate, which is further evidence that the crash is starting to hit wealthier owners and investors.

Still, though, there's almost no price reduction happening from Remax clients, so obviously the denial is still strong - probably being fueled by estate agents who refuse to accept that the boom is over.

Rent Vs Buy: Gardens - Excellent Views, Not So Excellent Yields

This 24m^2 bachelor flat in Gardens is on the market for R539 000 and has a gross rental income for R2 800. With a 100% bond you'd be paying in an extra R4 497 a month just to cover the R7 297 bond payments, the difference of R4 497 being 1.6 times the rental income. Here's the payment and yield graph.








So a 6.23% ROI if you buy in cash, about 4.5% below inflation. With a 50% deposit 1.89% capital appreciation is required to not lose any money and to break even on cash flow requires a 61% downpayment( over R330 000).

Rent Vs Buy: Mutual Heights - The Worst Investment In Cape Town

Back in March we showcased this 2 bedroomed apartment in Mutual Heights in the Cape Town CBD which was on the market for R2 395 000 and had a rental income of R6 000 a month, meaning that if you bought the place in cash you'd be making 2% return on investment, only 8.5% below inflation. Sensing the turmoil in the property market the agents have dropped the price to R2 350 000, a massive 1.8% price drop! Needless to say it's still on sale. One thing I forgot in the previous analysis was to include the rates and taxes of R636 a month, so what I thought was R4 200 in net rental income is in fact only R3 567. We also need to take into account the increase in interest rates. There mere fact that the rent and selling price are so out of whack should have you running for the door of the estate agency already.

If you bought this place with a 100% bond, the difference between the bond payment (R31 816 a month) and the net rental is R28 249 a month, 7.9 times the net rental! Ouch! For shits and giggles here's the payment and yield graph:

Sweet lord that is ABYSMAL. Paying for the entire purchase in cash will get you a whopping 1.82% return on income, which is only about 9% below inflation. To break even on cash flow requires a huge 88% downpayment, over R2 million!!! Putting down a 50% downpayment requires a 6.3% capital appreciation to not lose any money.

If you buy this place as an "investment" you might as well take your money, put it in a pile, pour petrol over it and set it on fire. This is the worst investment I've ever seen in Cape Town.

Rent Vs Buy: Parklands - R820 000 Investment = 0% ROI

Here's a 3 bed duplex apartment in Parklands on the market for R1 185 000. This unit has a tenant paying R4 900 a month in rent, which means that with a 100% bond the monthly bond payment is R14 900 a month and so the difference between the bond and the rent is R11 143 a month, 2.3 times the rent itself! Here's the payment and yield graph:

So buying the place in cash gets you a 4.96 return on investment, almost 6% below inflation. To break even on cash flow (that is to have a return on investment of 0%) requires over R820 000 downpayment. With a 50% downpayment you still need 3.16% capital appreciation to not lose any money at all! And once other costs are factored in - rates, levies, maintenance and vacancy - the returns will be even worse.

Buy My House And Let Me Rent From You

Here's an ad for a house in Oakdale on the market for R800 000. The ad lists that a tenant is available and it turns out the tenant is in fact the owner who is willing to rent at R4 000 a month. I guess the owner did the math and realised that paying R10 831 a month for a 100% bond on a depreciating asset is stupid when you could be saving close to R84 000 a year by renting. We've seen this happen before.

If you did buy the place and took the previous owner on as a tenant with the offered rent you'd be making 6% ROI, only 4.5% below inflation.

Someone's Getting Screwed And It Ain't The Tenant

This 2 bed apartment for sale doesn't have anything special about it except for this little note at the bottom:

Tenanted till Nov 2012.

November 2012? That's over four years away! Now if any tenant with half a brain signs a lease agreement that long then I sure hope that they got a decent rent discount,wrote into the lease agreement a rental escalation clause that is below inflation and some serious concessions (i.e. rent back) if the lease is cut short.

Harbour Views: Sitting Empty

Harbour Views in Woodstock was completed at least 18 months ago, so why are there ads proclaiming that you can "BE THE FIRST TENANT"? Perhaps it's because there are nine for rent ads listed on Private Property alone...

Buy Vs Buy: Queens Gate - You Either Hate Bathrooms Or Money

Why buy a 2 bed/1 bath duplex in Queens Gate for R1 600 000, when you can buy a 2 bed/2 bath duplex in Queens Gate for R1 250 000? Is having one toilet less worth an extra R350 000? Perhaps you hate money?

Tito Chickens Out: Hikes Repo Rate 50 Basis Points

Despite threatening to hike rates 200 basis points the Reserve Bank has now decided to raise rates by the standard 50 basis points. Tito shows once again he prefers death by a thousand cuts and I wonder if this will mean 2 or 3 consecutive rate hikes in the future as Tito constantly finds himself behind the inflationary curve.

Rent Vs Buy: Rondebosch Oaks - Invest R581 000, Make No Money

Here's a 1 bedroom apartment in Rondebosch Oaks (I assume that's in Rondebosch) for R900 000, tenanted until December 2008 with a rental income of R4 200 a month. With a 100% bond the difference between the monthly bond payment (R11 851) and the rent is R7 651 a month, 1.8 times larger than the rental income itself. The payment and yield graph is:

Paying for the place in cash gets you a 5.6% return on investment. To break even on cash flow requires a 64.5% downpayment (over R580 000) and even with a 50% downpayment 2.3% capital appreciation is required to not lose any money at all.

Rent Vs Buy: Green Point

Here's a bachelor flat in Green Point on the market for R750 000 with a rental income of R3 500 a month. With a 100% bond the difference between the montly bond payment of R9 875 and the rental income is R6 375, over 1.8 times the rental itself.



Buying the place for cash gets you a 5.6% return on investment, about 5% below inflation. You're only cashflow positive with a 64.5% downpayment and with a 50% downpayment you still need 2.3% capital appreciation to not lose any money at all. In reality yields will be less once rates, levies, maintenance and vacancy are taken into account.

Our First Hatemeail!

It's taken over two years but I finally received my first ever hatemail.

People likeyou are stuffing up our country and it just makes me angry because it is a really nice country and things you say damage the economy. Take how countries such as Argentina collapsed with people creating negativity. If you are not happy then leave the country and leave it to the people who want to live here and make a difference. I want to try improve peoples lives not destroy them

Beware my words, they have awesome power! I can destroy economies with the utter of a phrase (or blog post)!

Anyway I think our hatemailer has me a bit wrong. I've never said anything negative about the country or it's people, which over the long term I am generally upbeat about. I also have never advocated leaving SA, because frankly Cape Town is a fantastic place to live.

As for me wanting to 'destroy lives', if a reader had decided to hold off buying some overpriced piece of property and rent instead while being a judicious saver and shunned debt (something I have always advocated) he may find his life a bit easier as we head into the next few years of economic turbulence.

The Media Wakes Up

Sunday Times: It’s Crunch Time

Only took them about two years to realise...

ABSA: "House prices are dropping", Agents: "DON'T PANIC!"

Remember folks: Don't panic, but if you do, be the first.

From Business Day:

Du Toit said Absa was expecting a continued decline in house prices in real terms over the next two years.

Samuel Seeff, chairman of Seeff Properties, said there was “literally no house price growth in most areas of SA”.

But Seeff said there were a “couple of areas” that were bucking that trend. “Those areas are very much the upper end of the market.

“These include Bantry Bay, Clifton and the Victoria & Alfred Waterfront (all in Cape Town). [CT Bubble - Oh I'll just buy there then, I sure can afford the R60 000+/month bond payment]

“But for the rest of the market, what we’ve seen is that in general it is stagnating, and in real terms there is a decline,” he said.

Still, Seeff said he did not “believe that we need to go into panic mode”.

So if the market is going to stagnate for two years I guess that means all that "World Cup will boost property prices" from agents and other vested interests were bulldust.

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?