Data from the US shows that despite higher taxes and the introduction of the Sequester, the USA household balance sheet has improved meaningfully, retail sales have maintained solid growth, industrial output is back almost to its previous high levels, the employment situation is improving (189 000 new jobs have been created per month in the last five months) and, significantly for the South African housing sector, house prices in the USA have risen by more than 10 percent in one year, according to the STANLIB survey.
Property is the ideal asset class for those needing a steady income flow.
Kevin Lings chief economist at STANLIB predicts that housing activity will continue to recover and that this will contribute about 0.3 percent to the US economic growth in 2013, currently running at just above 2 percent
These and other factors raised the value of US household assets to almost $84 trillion at the end of the first quarter of this year and have also reduced home debt to a smaller percentage of overall household debt, says Bill Rawson, chairman of the Rawson Property Group.
“The increased confidence and optimism now seen in the USA will, I believe, be reflected in South Africa, as it has always done in the past, and the much improved performance in the US housing sector will also be seen here, especially now that repossessions are slowing down and in fact in some cases being terminated.”
He points out that in SA, there has been significant growth only in the lower priced properties, saying that by Q1 2014, the middle and upper middle house prices will also be showing growth that is above the inflation rate and therefore encouraging to investors.
What property bubble?
Meanwhile, Lew Geffen chairman of Sotheby’s International in SA says with the real estate markets in the US and the UK abuzz with speculation that a second housing bubble burst could be on the way, the question has arisen as to whether SA could also experience a rerun of the 2008/ 09 market collapse.
This is highly unlikely, he says, because of various reasons the most important of which is the fact that there is no longer a big surplus of unsold properties in the local market.
“Most of the properties that were in “distress” after the recession have now been disposed of through the bank-assisted sale programmes, and in fact we are experiencing a shortage of properties in many areas now because there has been so little new development over the past four years – in contrast to the over-exuberant development that was taking place prior to 2009.”
Geffen says housing markets only collapse when supply far exceeds demand.
In South Africa currently, home loan interest rates are stable at historically low levels and this takes care of the second key element required for a housing bubble to burst - rising interest rates that diminish housing demand.
He notes that in 2006, at the height of the last boom, the home loan interest rate was 105 percent, but by mid-2008 when the market started to collapse, the rate had risen to 15.5 percent.
Geffen says, while SA prices are currently rising on the back of increased demand, they are only doing so very slowly, which is not the case in the US, where economics professor Robert Schiller – who famously predicted the first housing bubble – recently said there was now a distinct danger of bubbles forming in several big cities.
The major factors contributing to the downward trend in house price growth are base effects, slowing month on- month price growth, which leads to lower year-on-year price (y/y) growth and conditions with regard to the economy and household finances in general.
According to the latest S&P/Case-Shiller Home Price Index, home prices in the US grew by an average of 12.4 percent in the 12 months to end of July – but there were some cities where the growth rate was much higher, like Las Vegas (27.5 percent), San Francisco (24.8 percent) and Los Angeles (20.8 percent).
With US mortgage interest rates on the rise now and the rate of new development speeding up, the worry is that price growth cannot be sustained at this rate and will collapse, leaving many thousands of new homeowners in negative equity as in 2008, he explains.
In the UK, worries about a second bubble have been sparked by the early launch of the second phase of the government Help-to-Buy mortgage insurance scheme, which critics say is akin to sub-prime lending in that it will boost prices artificially and set the banks up for thousands of loan defaults when interest rates and housing development start to rise.
In SA there are several safeguards in place to stop any similar scenarios from developing; these include the National Credit Act, for example, which banks and most other lenders apply to ensure that home buyers can really afford their home loan repayments, explains Geffen.
“To top that, banks are extremely conservative now in their valuation of properties for home loan purchases, and insist that more than two-thirds of potential buyers put down substantial deposits.
“In this way, they keep price growth in check and ensure that most buyers have sufficient leeway if and when interest rates do start to rise,” he says.
House prices
According to the Absa House Price Index, October saw a further slowdown in year-on-year growth in the average value of homes in the middle segment of the South African housing market.
The major factors contributing to the downward trend in house price growth are base effects, slowing month-on-month price growth, which leads to lower year-on-year price (y/y) growth and conditions with regard to the economy and household finances in general.
The weighted average price growth in the small, medium-sized and large-home segments was a nominal 8 percent y/y in October from 8.6 percent y/y in September.
In real terms, middle-segment house price growth was 2.5 percent y/y in September from 2.6 percent y/y in August.
Jacques du Toit Absa Home Loans property analyst says the average nominal value of small homes (80 to 140 square metres) was R789 500, medium-sized homes (141 to 220 square metres) R1 079 500 and large homes (221 to 400 square metres) R1 694 600.
South Africa has seen significant growth only in the lower priced properties, but by Q1 2014, the middle and upper middle house prices will also be showing growth that is above the inflation rate and therefore encouraging to investors, says Rawson.
Du Toit says continued low interest rates will support the affordability of mortgage finance and the property market in general and the bank expects house price growth to remain in single digits until 2014.
The FNB House Price Index shows growth of 7.8 percent y/y in October from 7 percent in September.
Report writers, FNB household sector and property strategist John Loos and Theo Swanepoel, FNB Asset Wealth property analyst, say this is the fourth consecutive month of acceleration in y/y house price growth since the 5.84 percent rate in June.
The average value of homes transacted in the FNB House Price Index was R911 424.
Loos and Swanepoel explain that evaluating longer term performance, compared to October 2003, the index is up 33 percent in real terms and 135.4 percent in nominal terms, still suggesting that the full price effects of last decade’s residential demand boom haven’t yet worn off.
Looking at the more recent past, in real terms the index is 19.8 percent down on last decade’s revised real price peak reached in December 2007, while in nominal terms it is a mere 15.7 percent higher, thus reflecting a partial price “correction” following the boom years, they say.
Should you buy residential property?
According to Rawson, some experts say investments in property, particularly residential property, seldom give as good a return as those in other asset classes, noticeably the Johannesburg Stock Exchange, based on their research analysis.
If you were wondering whether to believe these statements, he says almost without exception these comments are invalid because they ignore one of the prime advantages of property investment, the ability to gear it.
For example, he says an analyst will take, say a R1 million investment in a new sectional title apartment block or security estate, giving an initial 6 to 7 percent return (on the R1 million).
They will then compare this with the better returns one can still get from some of the good trust funds, which can give anything up to 15 or 16 percent - the property investment will then appear to be a poor performer in comparison to other investments.
For would-be buyers and investors, he says what the commentators in these cases very seldom take into account is that in almost every case the property investor is getting most of his returns on the bank’s money.
He will, if he is at all shrewd, have limited his deposit on the property to 10 to 50 percent of its sales price and will be borrowing the rest from the bank in the form of mortgage finance, where the interest rates are currently very low, explains Rawson.
“In practice, this means that the investor is usually getting between 15 and 20 percent on the money he actually paid out and probably also seeing satisfactory y/y capital growth in his property.”
He points out that many investors have between 3 and 30 properties which yield good rental income.
However, he says while it is true that selling a property at a fair price can be a slow process in relation to selling shares (which can often be achieved in 24 hours), property is the ideal asset class for those needing a steady income flow.
This is because the rents are paid monthly, and when a sale is achieved in almost any middle or lower middle bracket home, the profit in today’s market will be significant.
Yes news of defaulting tenants is putting off investors buying property, but when one uses a good rental agent, chances of signing a bad tenant are not very high.
So if you are looking to invest, remember that with property, being cyclical, good times will always follow, he adds. – Denise Mhlanga
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