Rent Vs Buy: Plattekloof - R2 Million Invested = R0 Returned

Here's a house in Plattekloof on sale for R3 395 000 with a rental income of R18 000 (despite the ad saying it's newly built and looks empty). That means with a 100% bond the difference between the monthly bond payment of R45 964/month and the rent is R27 964/month. If you're fully geared you'll be losing over R335 000 every year! Here's the payment and yield graph:



So paying for the place in cash gets you a mediocre 6.36% return on investment, about 6% below inflation. With a 50% deposit you still need 1.76% capital appreciation to not lose any money at all and to break even on cashflow requires a deposit of over R2 000 000! Who would've thought it would have worse returns than a flat in Ocean View Drive. Once costs are taken into account such as maintenance, vacancy and rates the returns are even worse.

Merrill Lynch, Lehman Brothers No More!

What the HECK just happened in America?!? Two major investment banks have been dismantled in a little over a weekend. Lehman Brothers is about to enter bankruptcy and Merrill Lynch is to be taken over by Bank of America. Has this EVER happened before?

Saturday Open Thread

Time for our weekly Saturday open thread.

FNB: Even Rental Activity Is Declining

Renting the way to go

The decline in the number of first-time home buyers has made the rental option more attractive, but people looking for homes to let are limited by affordability, say estate agents.

The FNB Residential Rental Barometer for the second quarter of 2008, released yesterday, showed a decline in activity from a rating of 8.4 to 7.6 . Agents who were polled for the national index said only 59 percent of rental properties on their books were snapped up in less than a month, compared with the 75 percent take-up recorded in the first quarter of the year — a 16 percent decline in activity.

The main reasons given for slowed activity was a 7.43 rating of landlords asking high rentals, and a 6.73 rating for the letting market being a tenants market.

Please note the sentence that I emphasised in the above quote. With the property bubble collapsing landlords (especially the recent buy-to-let crowd who have been losing thousands every month covering bonds that rentals don't pay for) have been hoping that with less property purchases there would be more demand for rental and so rentals will go up. Well as I expected the opposite has happened because in an economic downturn raising rentals, especially with reliable tenants, is a one way ticket to an empty 'investment' property.

Rent Vs Buy: Diep River - Great Opportunity To Lose Money

Here's a 2 bedroomed flat in Diep River on sale for R925 000 with a current rental of R4 800. "GREAT OPPORTUNITY FOR INVESTORS!" shouts the ad. That means with a 100% bond you'll be losing R7 723 every month, which is about 1.6 times the gross rental income. Here's the payment and yield graph:



So paying in cash gets you 6.23% return on investment a good 6% below inflation. With a 50% deposit you still need capital appreciation of 1.9% to not lose any money and to get cash flow positive on the rental income alone requires a 61% downpayment of over R570 000. Take into account ownership cots: rates, levies, maintenance and vacancy and returns are even less.

Clem Sunter: Things Are Going To Get Very Bad

Sub-prime at SA's door

"We haven't seen this since late 1970s," he says.

Sunter points out that one of his friends who wants to retire in the UK is trying to sell his home for four-million pounds, but the best offer he has received is just 1.6-million — 40 percent of the asking price.

"It has even spread to South Africa — you can't sell a house here," said Sunter.

"Things are getting very tough," he said.

"We had minor recessions in 1998 and 2001 — but nothing like we are seeing now," he said.

US Housing Market Nationalised

The US government has taken over control of Freddie Mac and Fannie Mae, who between them own 50% of all mortgages in the USA. In other words, the US housing market has been nationalised to prevent a collapse. So much for a free market eh?

Saturday Open Thread

Got something to discuss that we haven't covered? It's time for our Saturday open thread.

Rent Vs Buy - Bergvliet: Dreams Turn To Nightmares

This house in Bergvliet on the market for R1 850 000 is described as an "INVESTORS DREAM" and is tenanted at R8 500 a month. Buying this on a 100% bond means that the monthly bond payments will be R25 046 a month and the difference between that and the rent is R16 546, nearly twice the rental itself. Here's the payment and yield graph:


If you're the buyer you need to put down a massive 2/3 downpayment (over R1.2 million) to break even on cash flow and even with a 50% downpayment you need a capital appreciation of 2.61% to not lose any money at all. Paying for the place in cash gets you a dismal 5.51% return on investment.

Rent Vs Buy - Gardens Commercial Property

Here's a house in Gardens that has been turned into a small office. It's on sale for R3 400 000 and is tenanted on a two year lease at R18 000. Now before we do anything we need to remember a few things. Firstly this is a commercial property which means that a 33% downpayment is almost certainly mandatory. Secondly because this is commercial property, cash flow is king! Capital appreciation shouldn't even enter the equation.

So what's the yield and payment graph on this place. Let's check it out:


So putting down the minimum required downpayment nets us -13% return on investment, as every month you'll be paying in over R10 000 to cover the bond. Paying for the place in cash gets you 6.35% ROI, about 5%-7% below inflation.

Capital Appreciation Clowns Revealed

This ad for a bachelor flat in Long Street on sale for R399 000 is indicative of how some people (Capital Appreciation Clowns as they've been christened on Realestateweb message boards) have been buying property and relying on nothing else but capital appreciation wheb buying property:

Bachelor flat on Long Street. Superb position. Keen tenants paying R3000 per month - it is a lower than average rental because we told them we were going to be selling. Selling at way under value. Our bond is R450000.00. Remax gave a written valuation saying we should be marketing the flat at R530000.00. Reasonable offers will be considered.

The bond is R450 000 with a tenant paying R3 000 a month, which means every month they're currently paying in R3 092 to cover the difference between the bond payment (R6 092) and the rent, and remember that's gross rental - after expenses like rates, levies and other costs decrease the net rental income.

But you say "The seller is a victim of high interest rates!" but even if we reduce interest rates to 10%, the record lows they reached a few years ago our the seller was still losing R1 342 a month from paying in the difference to the bond.

If the R450 000 bond is indicative of the purchase price of the apartment then we are looking at a potential 11% nominal price drop. Factor in inflation and the loss is closer to 20%.

IOL Wakes Up: Yeah We Might Have A Property Problem

I believe this is the first time I've seen an article on the IOL (South Africas' largest newspaper groups) homepage talking about there being problems in the property market.

Property market in crisis

After a four-year boom during which prices soared, the property market is in crisis, with consumers facing a desperate struggle to get finance to buy or build homes.

Almost 40 percent of would-be borrowers have had their home-loan applications rejected by the four biggest banks since the beginning of the year as the credit crunch, sparked by stringent lending laws, rising inflation and higher interest rates, bites ever harder. Rejection rates have reached record highs.

...

With inflation reaching 13 percent last month, consumers are under pressure - they have racked up more than R1 trillion in household debt, up from R378,5-billion in 2002. They are now being forced to cut back on spending because of higher interest rates and the rising cost of living.

Household debt has TRIPLED in 5 years! Sweet googly moogly that is treading some dangerous water. But of course never fear... the World Cup will save us!

"However, the 2010 soccer World Cup could offset the current negative view of South Africa as an investment destination and this could drive momentum in the residential property market," he said.

Saturday Open Thread

Time for our weekly open thread. Got anything you want to discuss we haven't covered?

REMAX: Sales Are Down 36% - 50%

RealestateWeb reports:
SA's property market crash: grim new stats

There has been a 38% year-on-year decrease in the amount of national property sales transactions (across all property price brackets) between January - July 2008, compared to the same period 2007.

Total properties valued under R499 000 sold this year is 36% less than in 2007. Overall, the amount of sales transactions has decreased year-on-year by 42% for properties priced between R500 000 - R749 000; 39% for properties in the R750 000 - R999 999 price bracket, and 33% for properties with a R1 million to R1, 499 999 value.

In the higher price brackets, the largest decrease is recorded in the R1,5 - 2,5m price bracket: total properties sold so far this year is almost 50% less, compared to properties sold in this value bracket in 2007.

Rent Vs Buy: Protea North Wharf - Invest R1.4 Million, Make R0

The Protea North Wharf is another one of those hotels where the hotel owners get their upfront costs subsidised by "investors" who buy rooms (or rather some vaguely defined 'right' to the rooms income) and then get a share of the profits. Now the market for re-selling these 'rooms' is pretty much non-existent so I'm not so certain this 'room' at the Protea North Wharf on the market for R2 200 000 will sell for anything close to that. The ad claims the "average rental" is 10 000 a month which means with a 100% bond the deifference between the monthly bond payment (R29 785) and the rent is 1.9 times the rental itself (R19 785). Let's look at the payment and yield graphs:

So if you plonk down the full R2.2 million asking price in cash you can expect 5.45% return on investment, less than half of the 12%-13% you could get just leaving your money in a fixed deposit. To break even on cash flow requires a 66.43% downpayment, over R1.4 million, and even with a 50% downapayment you still need 2.67% capital appreciation to not lose any money at all.

There are a number of other reasons why this place will probably wind up earning a lot less in income. For one the hotel takes a cut of the rent (can be as high as 40%), and it's not clear here if the R10 000 a month is before or after that is taken into account, although we have assumed it's after. Also this is a hotel room which requires constant maintenance and cleaning so expect levies and maintenance charges to be higher than normal. And as I mentioned before the resale market for these is virtually non-existent.

Trevor Manuel: Stop Spending Money You Don't Have

'S Africans act like Americans'

Finance Minister Trevor Manuel said on Tuesday evening that South Africans were not adequately saving for tomorrow and preferred instead to consume in a US-like manner.

He said households were highly indebted and consuming in a manner that mimicked patterns in the US.

"They live on debt and are highly leveraged. It is not a basis of stability," said Manuel.

"If they are borrowing for consumption then there is something wrong in the equation," he emphasized.

Manuel said inflation targeting was a necessary policy as inflation hit the poor and those relying on a fixed salary the hardest and thus price stability was needed.

Urgent Property Sales Continue To Increase

Back in December I noted how the number of ads containing the word "urgent" had gone from 1 ad every 3 days in August 2007 to 20 ads in a a few days on Gumtree. Today I tried it again and there are 16 ads containing "urgent" in the past 24 hours alone.

Saturday Open Thread

Got something to discuss that we haven't covered?

50% Of Employed South Africans Can't Pay Debt!!!

Sweet googly moogly! Things are going to get crappy for a lot of people.

Six million can’t pay their debts

Experts told The Times that the economic “perfect storm” — high inflation, including food and fuel, and the resultant interest rate hikes — have driven six million South Africans to the brink.

Rajeen Devpruth, manager of statistics and research at the National Credit Regulator, said that by the end of last year, 6.3 million South Africans had “impaired credit records”, which means their payments were more than three months in arrears or judgment had been obtained against them for outstanding payments.

That’s half of the 13 306 000 South Africans currently employed, according to the latest Labour Force Survey in September 2007.

I Know! Let's Drop The Price 2.7%!

Our favourite Simons Town McMansion foreclosure has had a price drop! Instead of R3 600 000, the've slashed the price to R3 500 000! That's 2.7% off! It's a bargain now!

Johan Rupert: Downturn Will Last 5 - 10 Years

Rupert remains a bear

Remgro chairperson Johann Rupert told shareholders at the group's AGM in Stellenbosch on Thursday that the downturn globally - triggered by the sub-prime crisis - could be a prolonged affair.

Rupert, who warned of the financial crisis early last year, said the downturn - or recession - could last between five to 10 years as banks and major financial services companies cleaned up their operations.

"It's been a bit like getting overweight from eating, drinking and smoking too much, and then been told you have to run a marathon. For some it would take three years just to walk a marathon. So now you have frantic attempts by investment banks to get assets off their balance sheet."

"The best we can hope for - and it won't be quick - is that the system won't collapse in the process."

Ballinrobe: Will They Ever Finish It?

Reader PJ writes in:

I drive past Ballinrobe, a new development being built on High Level Rd in Sea Point every day. The site was empty for at least a year before they started building and in the past year they have been building all they seem to have put in is some foundation pillars. I have yet to see more than 4 workers on the site at any one time. The past two weeks all I saw was two workers who didn't seem to be doing much.

The original completion date was supposed to be June 2008 but they've pushed it back to June 2009, although at the rate they are going June 2010 seems more realistic. The sign on the site claims it's 70% sold, 100% I would guess are speculators. This place must've gone on sale in 2006 at the height of the boom and is going to be completed right in the middle of the property bust. If anything with the lack of workers and progress it looks to me like they're trying to draw out construction so it's completed when (they hope) the property market recovers.

Any readers out there have any more information about this place?

Demand For Credit Counsellors Skyrockets

Thousands more debt counsellors needed

South Africa needs 2 500 more debt counsellors to cope with its growing consumer crisis, debt counselling company Consumer Assist said on Wednesday.

The company's chief executive officer Andre Snyman in a statement said: "The counsellors were needed "to cope with the needs of more than six million indebted consumers, who are losing homes at the rate of 2 000 a month and 6 000 cars a month",

Well there's plenty of estate agents about to hit the pavements due to the "Great South African Estate Agent Cull" so there's one possible source of candidates. They can help their clients who they advised to get into debt in 2006, to get out of it in 2008.

REMAX CBD Inventory Jumps

Does anyone out there track the REMAX inventory in the City Bowl? According to PropertyGenie their inventory has grown by nearly 200 properties in the past week alone.

Update: Seems to have been a computer glitch.

The Estate Agent Cull Hits Sea Point

The Atlantic Seaboard is supposed to be one of the hot spots of the property market in South Africa, supposedly immune to the turbulence elsewhere. But down on the street it's not so rosy. Reader PJ writes:

Took a walk down Sea Point Main Rd and saw that two agencies have recently closed (International Realtors, Wendy Machanik Properties) and one moved to a smaller office (Lew Geffen Sotheby's).

Asking Prices Drop - Vredehoek: 31% (R400 000+) Price Drop

Here's an ad from April for a one bedroomed apartment in Vredehoek:

Charming one bedroom apartment in secure, small, upmarket and sought-after block. Private garden with views of city and Lion's Head. Secure off-street parking

And here's an ad from July for seemingly the same flat (same pictures, almost same description):

Beautiful sunny one bedroom flat with private garden. Small, secure and upmarket building, Vredehoek. Undercover, secure parking. Views of the city and Lion's Head.

The only difference, is the asking prices. The first ad had an asking price of R1 300 000, the second had an asking price of R895 000.

Now that original R1 300 000 asking price was probably never going to be reached but it just goes to show the 'wealth entitlement' people had. They deserve that million rand asking price damn it! It doesn't matter what people can afford!

Saturday Open Thread

Want to talk about something we haven't covered? It's time for our Saturday open thread.

I Know! Let's Drop The Price 2%!

Folks, if it's not going to rent at R5 000 a month, it's not going to rent at R4 900 a month.

FNB: Thank Us Later For Denying You A Bond And Losing Your Deposit

If you put down a deposit on a property and FNB reassessed your loan and denied you your bond causing you to lose your deposit, FNB says that you should thank them because in actual fact you probably were going to lose a lot more money later on:

Some home buyers could lose deposits

Kleynhans said it was possible some customers might lose their deposits on houses if they did not get the bond.

But, he said, the loss of a R30 000 or R50 000 deposit might "in the grand scheme of things" be better for the applicant than a much bigger loss if the client could not service the bond.

It was possible that if the customer was later forced to sell the property he could find himself with a shortfall of R200 000.

Let's say that R50 000 was a 10% deposit. That means the selling price was R500 000. If there's a shortfall of R200 000 then FNB are seeing a 40% nominal drop in house prices. Ouch.

Standard Bank: Our Bad Debts Are Rising

Standard Bank Q1 normalised headline EPS up 7%

STANDARD Bank posted a 7% rise in first-half normalised headline earnings per share (EPS) to 481,8 cents today, but said rising bad debts meant it could not give full-year guidance.

Rent Vs Buy: Strand - Invest R430 000 And Make Nothing

I thought small bachelor flats were the place to go for high yields? This bachelor flat in the strand is on the market for R599 000, while it currently commands a monthly rental of R2 200 a month. That means that with a 100% bond the difference between the monthly bond payment of R8 109/month and the rent is a whopping R5 909, nearly 2.7 times the size of the rent itself! Here's the (dismal) payment and yield graph:

Right so buying the place in cash gives you a fantastic 4.41% ROI, only about 7% below the official inflation figures. You break even on cash flow with a massive 72.87% downpayment of over R430 000.

The Ugliest House In Cape Town

I think I've found it and it's going for a song at R14 500 000 (available for R2 million cheaper at R12 500 000 over here). Have a look at this 3 storey monstrosity:

What the hell is that? Seriously it looks like something I used to build with Lego when I was 5. I particularly love how the entire property is paved to remove any semblance of greenery (except for that horrid paint job). I hope the architect ain't putting that on his CV.

Black Diamonds Hit The Credit Wall

One of the "saviours" of the housing market is supposed to be the Black Diamonds, the young black professionals who have been spending money like crazy the past few years. Only one problem though, they've been spending borrowed money (mainly via credit and store cards) and getting into a heap of debt, and now that debt is becoming overwhelming.

'Black diamonds' feel the credit crunch

Thembi Motaung, a manager at a South African legal firm, faced a painful choice when she started to fall behind in meeting hefty loan repayments on both her home and car.

"I had been defaulting on both my mortgage and car repayments for three months, so I had to choose which one to let go," said the 36-year-old mother of two who lives near Pretoria.

"I've been using public transport all my life so I found it easier to do without the car."

Having had to let go of her much-cherished Audi A4, Motaung joined a growing number of South Africa's so-called "black diamonds" who had fallen foul of the credit crunch and faced the heartache of repossession.

While a rise in interest rates, inflation and food and fuel prices have hit all sectors of South African society, research shows that the biggest sufferers have been members of the emerging black middle class.

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.

Trafalgar: Rental Vacancy Increasing

With inflation rising all the landlords out there are starting to think that now is the time to raise rent. Not so fast:

Middle-income households who rent are beginning to show economic stress, Andrew Schaefer, managing director of national property managers Trafalgar, said on Thursday.

"Our offices throughout SA report that vacancies in flats renting at R4 000 to R7 000 per month are rising, a typical occurrence in the late downward phase of the economic cycle," he said.

Raising rent in an economic downturn is the best way to find yourself sitting with an empty flat. Good tenants are worth their weight in gold.

Also I don't think we're in the 'late downward phase of the economic cycle'.

Ooba Confirms Property Market Troubles

Ooba (formerly MortgageSA before deciding to listen to some idiot consultant and change their name to something which makes no sense) have released the 'Oobarometer' which tracks house prices and (suprise!) it confirms the market is tanking.

THE fact that residential property prices are on the decline was given further confirmation yesterday with the launch of Ooba’s own house price index.

This showed prices had fallen 1,4% since June.

Ooba, SA’s largest bond orginator, which has a market share of 25%, said its index, called the Oobarometer, showed the average price of a property acquired last month was R782385, down 1,9% from July last year, when the average price was R798300.

And with inflation at 10%-12% that's a 12%-14% drop in real terms. If you took out a mortgage in the past year there's a good chance you're now paying more for an asset (and about to pay even more when the interest rate goes up next week) that is worth less than it was a year ago.

Rent Vs Buy: Stellenbosch - Playing Fast And Loose With The Truth

Here's a 2 bedroomed apartment in Stellenbosch on sale for R850 000 with a current gross rental of R4 000/month. Let's have a look at part of the ad:

Located in the Stellenbosch Golden triagle with 5 year growth of 23%-28%. The monthly rental income of R4000 will cover 40% of your bond repayment or be a usefull passive income for the cash buyer.

First off, if you get 23-28% of growth in the next five years you'll be extremely lucky, considering prices are trending downwards and only sub R500 000 properties in impoverished areas like the Cape Flats are seeing any growth. Secondly R4000 won't cover 40% of your bond because the advertiser hasn't yet taken off ownership costs like levies, rates, maintenance (and a student flat in Stellenbosch will require more maintenance than usual) and vacancy. And thirdly if you're a cash buyer you're much better off leaving your money in a fixed deposit where the 12-%13% interest you'll receive is more than double the 5.65% yield on this place. Here's the income and yield graph:

So as we mentioned before paying in cash gets you 5.65% yield, about 6% below inflation. A 65% downpayment is required to be cash flow positive and with a 50% deposit you still need 2.48% capital appreciation to not lose any money. And as we mentioned before, the returns are less once ownership costs are taken into account.

Tito: Inflation Targeting Is Here To Stay

Tito sticks to his guns

South Africa was better off with using inflation targeting as an instrument of monetary policy, the governor of the SA Reserve Bank (SARB) said on Tuesday.

"Let's stick to it for now," he told a gathering of Wits students.

He said while there were those who argued that alternative instruments could be used to fight inflation, these instruments - such as forcing banks to increase their reserves - weren't useful.

Mboweni said that lately, there had been calls to abandon inflation targeting.

"But that's because rates are high - when rates were low, no one called for inflation targeting to be shelved."

ABSA Bad Debts Hurt Barclays

Buried in this article on the mounting losses in British banking is this little nugget:

Barclays is forecast to reveal a 35% drop in profits to £2.6 billion as bad debts around the world, particularly in South Africa, combine with further losses from its exposure to the credit markets.

Now Barclays are the majority shareholders in ABSA so I assume it's ABSA that is the problem. And yet in the local press ABSA and the other banks are continuing to claim that there's nothing wrong and their bad debts are still at record lows, despite the fact they are canceling already approved bonds! I have a feeling the SA banking industry is being less than forthcoming.

FNB: We're Cancelling Approved Bonds

Here's a bit of a bombshell. FNB are going to be cancelling approved bonds on a 'large scale'. Realestateweb reports:
Home loan shocker: FNB pulls plug on property credit

Property deals are set to crumble, leaving developers, estate agents and conveyancers scramble to cover costs, as one of the biggest banks withdraws approved mortgage offers "on a large scale".

It's not just service providers who will be knocked financially: buyers and sellers with deals from other banks could find themselves high-and-dry where FNB pulls the plug on a key buyer in the chain.

FNB, one of the big four and part of the FirstRand group (JSE:FSR) listed on the JSE, confirmed to Realestateweb.co.za today that will withdraw home loan approvals "on a large scale".

Rent Vs Buy: Blouberg - R1 000 000 Invested, 0% Return

Here's a two bed apartment in Blouberg on the market for R1 590 000 (for "Investors" only the ad says, good way to exclude 95% of the property purchasing public out there) and renting out for R8 000 a month with a 10% escalation to R8 800 set to kick in in April 2009. Levies are R1 500 a month which means that the net rental income will be R7 300 a month. With a 100% bond the difference between the monthly bond payment of R21 526/month and the rental income is R14 226, nearly twice the rental itself. Here's the payment and yield graph:



So buying the place in cash gets you a terrible 5.51% return on investment, about 6%-7% below inflation. To break even requires a 66% downpayment of over R1 000 000 and with a 50% downpayment you still need 2.61% capital appreciation to not lose any money at all. Returns will also be less once rates, maintenance and vacancy are taken into account as well.

Standard Bank: House Prices Will Keep On Dropping

No respite soon for falling house prices

The residential property market is unlikely to escape its quagmire soon despite interest rates being near or at their peak in the monetary policy tightening cycle.

Sizwe Nxedlana, a Standard Bank property economist, said residential property prices were unlikely to recover in the near term due to the precarious state of household finances.

Nxedlana said the residential property market was driven by interest rates, inflation, employment growth and consumer sentiment. These drivers suggested the market would stay weak over the next year.

Rent Vs Buy: Table View - Wait Till After September...

Here's a 36 m^2 apartment in Table View on the market for R599 000 with a net rental income of R2 265 (R2 800 rent - R325 levy and R210 rates). It must be sold before the end of September says the ad. Or what? They'll increase the price again?

With a 100% bond the difference between the monthly bond payment of R7 446 and the net rental income is R5 181, over 2.2 times the rental itself. What's worse is that this apartment was on the market for R625 000 (for 36m^2 in Table View !?!) and if you'd bought it at that price you'd be covering a shortfall of R6 196 a month. Here's the income and yield graph:

Right so putting down a 50% deposit required 6% capital appreciation to not lose any money, while you'll only break even on cash flow with a 69.58% downpayment. If you buy the place in cash you'll make a pretty dismal 4.94% ROI, about what you could expect if you just left your money in a checking account. And once maintenance and vacancy costs are taken into account returns will be even less.

Rent Vs Buy: Diep River - Great Opportunity For Suckers

This 2 bed apartment in Diep River ("
GREAT OPPORTUNITY FOR INVESTORS!" shouts the ad) is on sale for R925 000 and is tenanted till April 2009 at R4 800 a month. With a 100% bond the difference between the rent, and the R12 523 bond payment is R7 723 a month, 1.6 times the monthly rent itself. Here's the rental and yield graph:




So if you buy the place in cash you can expect a 6% ROI (about 5% below inflation and 7%-8% below just leaving your money in a fixed deposit). With a 50% deposit you still need 1.9% capital appreciation to not lose any money and you'll only break even on cash flow with a 61% downpayment. Factor in ownership costs like levies, rates, maintenance and vacancy and your returns are even less. What an opportunity. I'll take two!

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.