Mixed signals surround the local property market
Jul 9th, 2009 | 1 Comment »
The past few weeks has produced some very interesting news regarding the South African property market. Here’s a short round up of what been happening.
Interest Rates:
Let’s start with the most recent interest rate announcement. The South African Reserve Bank (SARB) surprised everyone when it announced that rates will remain unchanged. Clearly the SARB is beginning to feel the pressure of high inflation levels. The Prime Interest Rate stays at 11%.
Click here for a graphical illustration of how interest rates have changed.
House Prices:
While FNB Home Loans are reporting that average house prices are dropping by about 2% month-on-month, ooba’s figures show that property prices are actually increasing.
Ooba’s own house price index, the oobarometer, actually reported a 1.2% year-on-year increase in house prices.
The average purchase price according to the oobarometer is R774 449 in June 2008, compared to R784 427 in June 2009.
Trends:
The South African Property Transfer Guide reported that cash purchases are also increasing as a percentage of total property sales. This may due to the fact that many potential buyers are unable to source the finance needed to purchase a new property, causing the shift in the ratio of bonded sales to cash sales.
Advice:
Today Kevin Mountjoy of Bond Choice was quoted as saying, “the time for purchasing property has never been more advantageous”.
Mountjoy points out that property values at the 2006 levels and interest rates are at levels last seen during the 1980s.
Bond Choice,
January 4th, 2010 at 11:38 pm
(1) House prices will keep falling. Prices are still dangerously high compared to incomes and rents. Banks say a safe mortgage is a maximum of 3 times the buyer’s annual income with 20% downpayment. Landlords say a safe price is a maximum of 15 times the house’s annual rent and buyers are still borrowing 6 times their income and putting only 3% down, and sellers are still asking 30 times annual rent, even after recent price declines. Renting is a cash business that proves what people can really pay based on their salary, not how much they can borrow. Salaries and rents prove that prices will keep falling for a long time. Anyone who bought a “bargain” this time last year is already sitting on a very painful loss. House Prices were hiked by a massive 350% from 2003 to 2007 by local and foreign property speculators.
(2) It’s a terrible time to buy when interest rates are low, like now. Estate Agents just lie without shame about this fundamental fact. House prices fall as interest rates rise, because a fixed monthly payment covers a smaller mortgage at a higher interest rate. Since interest rates have nowhere to go but up, prices have nowhere to go but down. The way to win the game is to have cash on hand and to buy outright at a low price by demanding to offer 35% to 45% Below Market Value (BMV) when others cannot raise up cash or obtain a bank loan. To buy at a time of low interest rates and high prices like now is a mistake. It is far better to pay a low price with a high interest rate than a high price with a low interest rate, even if the mortgage payment is the same either way.
(3) Your property taxes and rates will be lower with a low purchase price. A low price gives you the ability to pay it all off instead of being a debt-slave for the rest of your life. Paying a high price now may trap you “under water”, meaning you’ll have a mortgage larger than the value of the house. Then you will not be able to refinance because there you’ll have no equity, and will not be able to sell without a loss. Even if you get a long-term fixed rate mortgage, when rates inevitably go up the value of your property will go down. Paying a low price minimizes your damage.
(4) Because buyers already borrowed too much money and cannot pay it back. They spent it on houses that are now worth less than the loan. Buyers used too much leverage. Leverage means using debt to amplify gain. Most people forget that debt amplifies losses as well. If a buyer puts 10% down and the house goes down 10%, he has lost 100% of his money on paper. If he has to sell due to job loss or a mortgage rate adjustment, he’s bankrupt in the real world.
(5) Higher-end houses especially are now, are set up for a huge fall in prices, since there is no more fake equity from the sale of a previously overvalued property. Without that equity, most people don’t have the money needed for a down payment on expensive houses. It takes a very long time indeed to save up for a 20% downpayment when you’re still making mortgage payments on an underwater house.
(6) There is a massive and growing backlog of latent repossessions on the horizon. Thousands of homeowners have simply stopped paying their mortgages. If a bank forecloses and takes possession of a house, that means the bank is responsible for property taxes and maintenance. Banks don’t like these costs. If a bank then sells the foreclosure at current prices, the bank has to admit a loss on the loan and banks hate to admit this fact. There is a tsunami of lined up foreclosures on the way that the banks are ignoring, for now. To prevent a justified foreclosure is also to prevent a deserving family from buying that house at a low price. Soon, these foreclosures will wash over the landscape, decimating prices, and benefitting millions of families who will be able to buy a house without a suicidal level of debt, and maybe without any debt at all!
(7) First-time buyers have all been ruthlessly exploited. “We were all corrupted by the housing boom, to some extent. People talked endlessly about how their houses were earning more than they did, never asking where all this free money was coming from. Well the truth is that it was being stolen from the next generation. House price increases don’t produce wealth, they merely transfer it from the young to the old – from the coming generation of families who have to burden themselves with colossal debts if they want to own, to the baby boomers who are about to retire and live on the cash they make when they downsize.” Banks survive upon this method and it is now upon the people to refuse to be victims of this vicious pattern.
(8) High house prices have been very unfair to new families, especially those with children. It is foolish for them to buy at current high prices, yet government leaders never talk about how lower house prices are good for South African families, instead preferring to sacrifice the young and poor to benefit the old and rich, and to make sure bankers have plenty of debt to earn interest on. Every “affordability” program drives prices higher by pushing buyers deeper into debt. Increased debt is not affordability, it’s just pushing the reckoning into the future. The government pretends to be interested in affordable housing, but now that housing is becoming truly affordable via falling prices, they want to stop it?
(9) Bank and Estate Agents will disagree, because they get nothing if there is no sale. Agents want their clients to buy no matter how bad the deal is, which is the exact opposite of the buyer’s best interest. Estate Agents take R35 billion each year in commissions from buyers. Agents claim the seller pays the commission, but always fail to mention that the seller gets that money from the buyer. Think about it: who brings the money to the table – the seller or the buyer? All money comes from buyers. No buyer, no money.
(10) Equity is just money. Renters are actually in a better position to build equity through investing in anything but housing. Right now, renters have the advantage of demanding lower rentals because of the huge influx of houses available to be “mortgage-paid” by renters. Renters can get rich much faster than owners, just by saving the money that owners are wasting on mortgages, taxes, and maintenance. Renters are getting paid to wait, both by the monthly savings and by watching the value of their savings increase relative to housing. Owners are losing every month by paying much more in interest than they would pay in rent. Owners are losing principal in a leveraged way as prices decline. A 14% decline completely wipes out all the equity of “owners” who actually own only 20% of their house.