If you buy a house that has been lived in for a number of years it will cost you about 30% less than if you buy a brand new place that has never been occupied before according to figures released by First National Bank last week.
A brand new ‘affordable’ apartment of 30 sqm costs around R300k in different parts of South Africa. It can be considerably more if you’re buying something in Clifton or Camps Bay but the average cost per square metre for an ‘affordable’ property in reasonable suburbs (including Mitchell’s Plain or Cosmo City) is around 10k per square metre.
Talk to the developers and they say the high costs of developing a site, combined with the high costs of labour and materials determine the price of the property when it is released onto the market.
All the developers are really quick to claim that the profit levels are minimal particularly when the money is tied up for so long before the first unit is sold. So if they’re not making good profits, why are they doing it?
The answer is actually that they are making huge profits and they’re just fudging their answers to dissuade me (and you) that they’re making lots and lots of bucks.
Much the same pattern applies to material suppliers. These organisations blame everybody else except themselves for the exorbitant prices of cement, bricks, plaster, tiles, fixtures and fittings and even glass.
The manufacturers and suppliers point fingers at the retailers claiming that they are the ones who are keeping prices high; then they point another set of fingers at the high costs of transporting their products from the factory to the site (or the retail outlet). They even blame the low productivity of workers for the high prices of products made for the building industry.
Do they blame themselves or do they reduce their margins? Not a chance. In fact year after year your large material suppliers provide handsome dividends for their shareholders. So, like developers, they too are making money – and lots of it.
The final culprit in this rather depressing cycle of profiteering is the banks themselves. You see it’s the banks that are prepared to fund the developers and then grant the bonds for each pokey little flat measuring five metres by six metres into which has been crammed a kitchen and bathroom too.
Recently, Human Settlements Minister Tokyo Sexwale urged developers, material suppliers, architects and engineers to come up with innovative ways to resolve the housing problems that face South Africa.
Well, here’s a thought Mr Minister: how’s about getting the developers, the materials suppliers and the banks to stop profiteering. How’s about getting them to stop driving prices higher and higher?
How can we do that?
Well let’s look at the existing position first of all. One of the attractions for buying a new property – particularly for first-time homebuyers – is that a new property is free from transfer duty and, in many cases, first-time buyers even qualify for 100% bonds.
Sometimes buyers are supported by a developer who offers a cash-back advance to them if they sign the deal. In fact, on a 140 sqm house costing R1,4-million I was offered a R50k cash-back (to spend on new furniture or other things I was told) if I agreed to buy the home.
If I was prepared to buy a slightly bigger place, costing R1,6-million then I’d get R100k cash-back advance. Sign the deal, get the money and spend it on a new plasma TV for the lounge, curtains for all the bedrooms, new furniture for all the rooms, buy some new appliances and so on. Even spend it on having a holiday after all the stresses of moving if I choose to.
And developers tell me that they’re not making handsome profits. Pull the other leg Mr and Mrs Property Developer.
Do you ever hear about a cash-back advance on the sale of an older property? Do you get any relief on transfer duties, bond costs, legal fees or any of the other charges that are added to a property transaction? You don’t even get a discount on stamp duty.
So what we know, clearly, is that the deposit, the transfer fees and the other charges make older properties unaffordable for first-time buyers unless they have a large amount of cash in their pockets to spend on the property.
So the stumbling block that’s preventing sales of second-hand homes is the additional costs that must be covered. That being the case, Mr Minister, why don’t you and your advisers come up with a way to reduce those costs or at least make them affordable for many millions of South Africans?
Of course the argument is that developers are paying Value Added Tax on the materials they buy and because of the VAT the property doesn’t attract transfer duties. So what about a VAT amount that gets included in the sales price of older properties (and therefore is included in the price) instead of transfer duties.
That way people could get a bond (including VAT) for the second-hand property they want to own and not pay any transfer costs at all. Sure, they’d have to cover the legal fees to feed the ever-hungry attorneys that do all the paperwork but those costs are relatively small compared with the many other charges.
Perhaps there are other ways that you, Mr Minister, can come up with to resolve the sales of property in the second-hand market and I think that there are many possible solutions too. But the reality is that the problem of transfer fees, deposits and other costs must be addressed.
More importantly than that, though, is that if you re-energise the second-hand property market the bottom will fall out of the market for new properties. Particularly so if banks come to this party and provide the bond finance required to buy older properties.
If that happened, the price of new homes would plummet.
And, if developers stop developing new properties, the materials suppliers would find that their sales levels fell sharply and they’d be forced to do something about their prices too. Like a pack of cards, the materials prices would come tumbling down too.
And so the entire cycle for reducing costs would start to work: Materials prices fall; new property prices drop correspondingly and stay there until new buyers come into the market and start buying properties that are actually affordable.
But to claim, as developers do right now, that a pokey little apartment costing R10k per square metre in a distant suburb far is ‘affordable’ is nonsense.
If you ask me, affordable is about half of that?
*Hartdegen writes a regular column for Property24.com. The content of his columns constitutes his personal opinion and doesn’t pretend to be facts or advice. Contact him at paddy@neomail.co.za.
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Spot on, although a developer does put huge amounts of money into a development the money some make is crazy.
A mate of mine built a “townhouse” sized flat on his property. 2 Bedrooms, 1 Bathroom, huge lounge and very nice open plan kitchen. All this was for ~R120 000. He used top quality materials. Developers normally use cheaper materials and their attention to detail is nowhere near what my mates was.
A similar sized Townhouse in the same area sells for R500k plus. That is a 300% PLUS return on investment.
The banks and everyone else involved in the sale of property realised the truth of the higher the prices, the higher the fees. Thus you cannot take on one entity alone. This animal is like the mythical Hydra and cutting one head will only let another grow back.
Perhaps the competition board should seriously look into anti-competitive practices by stakeholders in the property industry. - Corry Versluis
Paddy, you’re right about the developers, especially the “Rape & Escape” characters that leave badly built units that the body corporate and the buyers have to repair. The army of inspectors you have to pay for do nothing.
But productivity is the real problem I think. Apparently our productivity is 1/7 that of an EU worker, so that’s 7 families you have to feed to produce a day’s work, from the material through to the construction.
I wrack my brains to figure out how to build something to rent out at an affordable rate and still show a return on investment here on the West Coast, can’t get an answer to that one and I reckon productivity is the problem. - Gideon
You are quite right about the high (or huge) profit margins, most developers I have dealt with do not do a development if the profit is less than 20%, some even take profits of up to 50%, and that profit is paid for by the buyers of the units in the develpment. - Dean
Paddy this is what moladi has been saying for the last 24 years – the way to reduce cost is industrialize and consolidate. - www.moladi.net
Instead of talking about the high prices of materials why not apply your mind and do price comparisons, and then comment. The majority of developers do not buy from retailers, but directly from manufacturers (for bulky items like bricks, sand, stone), and do shop around. Take a look at my site (www.windoor.co.za), register, and look at the prices compared across manufacturers for the “same product” – yes, we’re talking windows, doors and hardware, but the margins are not great – we hardly ever venture into the 20s when it comes to gp.
In our market there is enough competition to keep prices down – it is the big retailers that bump up the prices to pay for their overheads – everyone else sells at realistic levels and markups and it is up to the consumers to start being a bit more proactive and sourcing the smaller guys that can discount and are willing to offer better service – just like all the contractors who subscribe to our service say – they all come back due to the fact that our pricing is that much better than the bigger guys... - Jon-Jon Keegan
I do not agree with this point of view at all. Surely, for any buyer – first-time or otherwise an application for a bond would be in order. Perhaps the problem with property buyers in this country is that they are by and large lazy and expect the world. R1 500 000 for a newly built 140 sqm property (I am assuming it is a flat) is ludicrous and I wouldn’t touch it with a barge pole. I watch a lot of the property programmes on the Home Channel and on the BBC Lifestyle and have done for a number of years. Lately it has becoming glaringly obvious that the catch phrase in these programmes is no longer location, location, location but COMPROMISE. Now this is where the lazy bit comes in. All buyers aspire to live in the north or new north. Well, they can have it. I found myself at the Woodmead Value Mart about a month ago and even in the shopping centre I felt very, very claustrophobic and I am not usually. If buyers would take the time to look out of their preferred area they might be surprised as to what they might find. Let us take the East Rand for example. You can pick up an older solid, low-maintenance three bedroom, two bathroom with double garage pool the whole tutti-frutti for under a R1 000 000. So let us look at the transfer fee situation: on such a property R25 000 according to my calculations. But the travelling to Sandton I hear everyone scream – Rhodesfield Station is 5 minutes down the road and stops right at Sandton City. Then there is the little matter of space – these houses have this in abundance because it is on older property so was built in the days when things were built big and open and they come with real gardens with actual real live trees, plants and flowers in them that grow out of the ground and not out of a pot and not with just a 3 x 3m patch of grass. But I suppose at the end of the day, if you enjoy having your neighbours watch your every move, and I mean, every move then you must pay. If you enjoy watching your neighbours every move (perhaps with a bond of that amount you cannot afford a T.V.) then you must pay the asking price and shut up. But then again, perhaps all future buyers should stay away from the East Rand so that those of us that have always lived here can continue to do so in peace, quiet and solitude and we can continue to enjoy our wide open uncramped shopping centres. Now that you cannot put a price on. - Adams
Hi Paddy, put your PEN down and put your money where your mouth is! I challenge you to undertake and complete ONE development yourself profitably! Maybe people should save more then they will be able to afford what you term expensive! - Schalk van der Merwe.
I think your grasp of economics may be shaky. Firstly. If developers stopped building houses the prices of materials will initially drop. House prices will continue to rise at the standard rate that house prices rise. Then the suppliers will cut back on the amount of material they carry. Eventually a house shortage will ensue with the resultant property boom. (Remember, this is when the property owners, NOT developers start to charge exhorbitant prices). The increased demand for property will increase the demand for materials (which will now be in short supply) and this will cause an increase in the prices of building supplies…. Etc. etc. etc.
Secondly, all developers have to include the 14% VAT plus the 1,3% NHBRC fee in their sales prices. That accounts for ± half of the 30% that new houses are more expensive.
Thirdly, the 14% VAT is charged on the full price of the house. Whereas there is no transfer duty on the first R500,000 of a property and even then it only goes up to 5% on the next tier etc. Transfer duty is a lot cheaper than VAT.
Lastly, if property development was so easy and lucrative, why is it one of the sectors with the highest rate of bancruptcy?
Also, your arguments could also apply to motor vehicles, furniture, food stuffs, newspapers & magazines etc. I don’t see any of them rushing out to reduce their margins. - Mark Chimes
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