The South African housing market has been somewhat buoyant. The question is: Will it remain so

Expectations are that the SARB will leave interest rates unchanged at the MPC meeting on 26th March. This expectation follows on the heel of Governor Yelland’s indication that the United States Federal Reserve will not be raising interest rates soon in that country as inflation is very low ( less than 1%), and meaningful job recovery is still sought in the US economy. This news will no doubt help retain our trend.

According to FNB, the final quarter of 2014 saw South Africa’s Household Sector continuing to lower its vulnerability to debt-service cost “shocks”.

While still highly indebted and highly at risk, in 4th quarter 2014 South Africa’s Household Sector continued to gradually lower its vulnerability to any unwanted interest rate hiking surprises or economic shocks, by further lowering its Debt-to-Disposable Income Ratio. According to the South African Reserve Bank, a further decline in the Household Debt-to-Disposable Income Ratio, from a previous quarter’s revised 78.1% to 77.6% in the 4th Quarter of 2014. This brings the cumulative decline in the ratio since the early-2008 peak to 11.2 percentage points, which is significant.

All of this means that the Household Sector is moderately better positioned to weather an interest rate hiking “storm” this time around compared with 2008/9, due to its overall level of indebtedness being considerably lower these days compared to that period.

Another angle to take in answering the question is to look at buyers who are acquiring Buy-to-Let investments. The 1st quarter 2015 FNB Estate Agent Survey pointed to no further increase in the significance of buy-to-let buying in the market compared with the previous quarter. By this FNB means that, as a percentage of total home buying, buy-to-let purchases are estimated by estate agents who responded to the survey to have remained unchanged on the previous quarter at 9%, the 3rd successive quarter of this estimated percentage.

FNB believes this percentage trend is a healthy one, reflecting that the property market is not running away with itself as it did prior to 2008’s sub-Prime crisis. The percentage remains mediocre in comparison to the estimated 25% back in the boom times of early-2004. Household Sector Real Disposable Income (simply, what we put in our pockets) growth remains constrained by sustained weak economic growth for the foreseeable future, while Government taxes, fuel levies and statutory costs, like electricity, continue to rise.

In addition, the rental market’s performance in recent years has remained lacklustre. At low interest rates, people would rather try to buy their own property. In the Western Cape though, the value for money by renting often exceeds what similar payments per month on a bond could buy. In other words, rental returns are low compared with Gauteng.

Nevertheless, a stable buy-to-let percentage of total home buying should imply a gradual rise in the volumes of buy-to-let purchases, because we have seen gradually rising overall transaction volumes in the residential market in recent years.

Looking at 1st time homebuyers, the 1st Quarter 2015 FNB Estate Agent Survey once again returned a strong estimate of 1st time buying levels expressed as a percentage of total home buying, although a little down off the peak percentage of a few quarters ago. FNB believes that the mild decline may just point to a slow decline in home affordability that has appeared recently. Obviously, this would deteriorate quicker if interest rates were to rise.

According to the sample of agents FNB surveyed, 1st time buyers were estimated to be 25% of total home buyers. This is slightly lower than the 28% high of the 2nd quarter of 2014, and the percentage has now been lower than last year’s high point for 3 consecutive quarters, causing the smoothed trend line to point slightly downward. As before, FNB believes that the mild decline may just point to a slow decline in home affordability.

FNB has two very interesting indicators. FNB’s Home Affordability measures include the Average House Price/Average Labour Remuneration Ratio, as well as the 100% Instalment on an Average Home Loan/Average Labour Remuneration Ratio. In simple terms, these two indicators measure how affordable it would be for the man-in-the-street to buy a house and make the payments on the bond. These indicators started to rise in 2014 after prior years of decline because of the net result of house price inflation exceeding wage growth, and of course the minor interest rate hikes last year.

It would appear, too, that an increasing portion of 1st time buyers are indeed concerned about house price increases and affordability challenges, according to FNB. “Buyer Panic” refers to a state of mind where aspirant 1st time residential market entrants begin to fear that if they don’t buy a home quickly, the price levels will rise to levels where property becomes unaffordable for them. This can cause “inappropriately high” levels of 1st time buyers over-extending themselves financially as they attempt to get a foot in the property market “before it is too late”. This, in turn, can cause market “price bubbles”. FNB considers the market still appears to be far from this point but buyer panic must always be a concern where it exists.

So back to the question, Will the South African home market remain somewhat buoyant? It would appear from the above that the market is better than recent years but not over-heated or unreasonable in any of the residential property sectors. So, we will probably retain current growth levels for the foreseeable future.

A closing comment. Interest rates may not be the key determinant of home buying. There is a large dose of “Confidence” that comes into play. Think of it this way, when you buy a house you want to know it’s for keeps and your work circumstances are stable and certain. Fear of job loss, and a sense of uncertainty about the future could keep you renting.

Your mortgage bond is your best friend

Obviously, you don’t feel like that right now. That monthly payment for “as long as you’ll live” feels interminable. And you’re hearing lots of news about inflation and rising interest rates. Then there’s all those other expenses that chew the rest of your monthly income.

But let’s look at things a little different and see some light at the end of the tunnel.

  1. Your mortgage bond gives you your primary place of residence. It pays for “home”. Your home is growing in value, slowly but surely. So, at some point in time, when your salary has risen and your bond has decreased you will have Equity in your house. That is a turning point in your wealth creation. Just by the way, I once said that your home is most peoples’ biggest asset and I was corrected. Your pension, for most people, is their biggest asset so look after it.
  2. When you have the spare cash monthly, pay extra on your bond. If I told you just a 10% increase in payment would save you 5  years [54 months to be precise], in payments. On a R1m bond over 20 years that equals R341662 in saving. Obviously, that gets better over a 30 year period and with more than 10% incremental payment. Can’t do it now? Then set the financial goal to force a saving of whatever you can afford.
  3. Remember, whatever you save earns tax free returns. The reason is simply that you save interest instead of paying interest and the bank earns less while you have a saving over the period.
  4. Obviously, there comes a point when your bond may be paid off. That’s a huge saving in monthly cashflow. Aim for it, it holds a hidden gem.
  5. At some stage, your equity or your paid off bond releases cashflow for an investment property. That’s an exciting prospect.

We’ll talk more about property investment in this blog, but aim in your portfolio to have a rented property or two when you retire. The great thing about it is that it is paid by somebody else. Of course, there are nightmare stories about tenants but there are many more about great returns from a tangible asset. What is most interesting about a rented property is that the mortgage bond, serving as an access facility, becomes your overdraft if you want it to be. Interest is tax deductible and the facility can be used for all sorts of luxury and wealth generating activities. For instance but not recommended, you can go overseas and repay the bond. Better still, you can buy a business or invest in other assets or another property by simply using the paid off rental property. It also helps that if a business doesn’t succeed, you have not risked your home in the process.

Property may not always be the best return in your portfolio. Many will also say that a property fund is the easiest way to invest in property – this blog does not disagree. But, for the sheer investment enjoyment of property, a buy-to-let investment is good to own and use.



Welcome to the Homeloan Junction Blog

Starting a blog on property is daunting for me. There are so many great people out there with the most amazing knowledge of the property industry. In fact, I welcome their input into the blog as we proceed.

There are lots of articles  about swimming pools, maintenance and the need for it so as to retain value.

But I wanted to start at a point and compliment the role players in this industry. Those men and women, from labourers to billionaire owners, who wake up every day with a passion to drive property. In essence, what you provide is the residence for business, people and families. None of us would be comfortable and clean in the absence of a roof over our head and a bed and shower to use. Little matters more than housing and food to an individual.

The cycle begins with Developers who take the risk to provide housing. From the multi-million to the Affordable unit. Great risk and not always great reward. It was tragic in the sub-Prime crisis that the Banks withdrew finance to these developers – the suppliers of “housing to the nation”. In hindsight with the dust settled, it seems that we lost sight for a few years on the national asset of housing and couldn’t really see the crisis clearly. As we talk more, we will see that the environment has changed and now affordable housing is going up at an exponential rate.

Then the Estate Agents and their Principals. What an amazing group of people – frustrating to some sellers but nonetheless, the reason why 98% of our houses and factories are sold with contractual efficiency. I think they’re great and the few that upset, well, so be it. the firms that I know are professional to the nth degree and deliver as specialists.

To the Banks, Conveyancers and the Deeds Office, you are the glue ensuring finance and strong title in a world class manner.

Look forward to hearing from you in due course.

Jack@ Homeloan Junction