THE CONFIDENCE ELIXER

It is not profound to say that good news is better than bad news but, my goodness, the statement in property that there is some good news is very profound. The reason, as we’ve discussed many times, is that Confidence is the primary yeast of mortgage book building and mortgages mean house sales. In addition, in this blog I have nailed my colours to the mast and said that Gauteng is on the verge of increasing house price movements. Good news, obviously followed up by business activity, will change the shape of Gauteng house prices. The sleeping giant will arise in my humble opinion and, in turn, Cape Town will slumber for a season. In the former, house prices are too low to represent value and in the latter too high to represent value. Put incredibly simply, selling a house in Joburg and trying to replace it in Cape Town is well-nigh impossible. I have two friends [sad hey? – just joking], who are experiencing this big time; the one Joburg to Cape Town and the other, even in KZN’s North coast developments.

This trend is highlighted in the latest FNB Property Barometer: 1st Time House Buyers. John Loos reports:

 

We find Gauteng still to be the strong 1st time buyer region on the one hand, and Cape Town to be the very weak 1st time buyer region on the other.

 

Greater Johannesburg had an estimated 1st time buyer percentage of 21.59% for the 2 quarters, and Tshwane Metro a massive 30.75%.

In the 3 major coastal metros, Ethekwini Metro had the highest rate, i.e. 20%, Nelson Mandela Bay a weak 10.5%, and Cape Town Metro a very low 6.46%

These major divergences partly reflect diverging home affordability trends in recent years. We believe that slow house price growth in Gauteng over the past decade or so has greatly improved home affordability (average house price/average household income ratio), whereas at the other end of the spectrum, Cape Town’s home affordability has deteriorated significantly during recent years of greater market strength and strong house price growth.

 

In short, FNB is saying that new homebuyers can’t afford the prices in Cape Town but can afford the slowed down prices in Joburg. Extrapolate that fact a few layers upwards and the middle+ markets, who are baulking at Cape prices, are seeing value in Gauteng. Really glad that we have this green shoot confirmation of above-average rising prices in Gauteng; a stance this blog has taken since December especially.

And here’s a stab in the same direction – the national GDP growth rate is going to be at or near to 1% for 1st Quarter 2018. May be naive but we should not underestimate the force of positive news on our economy.

A person who I have not had the privilege of meeting but who I admire through the Press is Andrew Cantor, CIO of Futuregrowth. Futuregrowth is a huge investor in Commercial and State Owned Enterprises [SOE’s]. It was Futuregrowth, with other significant players, who eventually refused funding to Transnet, Eskom and that other cash-eater, SAA, in 2016/7. Thankfully, we have not yet experienced the dire predictions of those times and may it remain so. But Andrew has written an article entitled, It’s not so gloomy in SA, in Financial Mail, the main points of which I share with you as an extract:

It has become all too easy to overlook the positive forces that have been at work in the country in recent years, and to underestimate the potential that exists for positive change.

It is my belief that SA has many core strengths and that its challenges can be met. I am comfortable, on a daily basis, to invest pensioners’ savings into this country.

We all know the bad news. So, to explain my confidence, I’d like to offer some perspective.

SA has witnessed a remarkable political change: a new president, new cabinet and clear evidence of a crackdown on corruption.

The Futuregrowth credit team has, since the fourth quarter of 2016, been in engagement with the six largest state-owned enterprises about issues of governance. We found that four had reasonable governance structures and practices and, subject to certain changes, we recommenced lending to them. Eskom and Transnet have been at the centre of serious allegations and these are being investigated through various parliamentary and judicial processes. Our analysts continue to be in discussions about governance and improved disclosure with both these organisations and are finding them co-operative. We have not yet recommenced lending to either.

As we look back, there are some very positive signs despite the past difficult decade:

  • SA’s constitution and judiciary have stood the test. The principles of the constitution were defended repeatedly by a free and independent judiciary.
  • SA’s incredibly free press played a critical role in creating a channel for truths to be aired and for the public to become aware of the problems.
  • Democracy itself has played a key role. The ANC suffered meaningful setbacks in the municipal elections of 2016, and the mood of the electorate was a clear warning that change for the better was vital for the party and the country.
  • Civil society found its voice through whistleblowers, e-mail-leakers, writers, academics, entertainers, financiers and others.
  • National treasury is the linchpin of fiscal control, and has a strong culture, with many dedicated professionals.
  • Often forgotten, the Reserve Bank has constitutional protection, a clear mandate and independence.
  • And SA has a large, professional and ethical investment community with a strong pension fund investment culture, legal frameworks and regulatory oversight.

As a bond investor, I deplore the weak standards in SA’s listed corporate bond market. However, that perspective can do an injustice to SA’s very strong equity market and its remarkable government bond market. Both are world class.

And we are in a unique historical position to effect positive change.

Despite good global growth in recent years, domestic mismanagement has undermined fiscal accounts and economic confidence — resulting in low domestic growth, credit-rating downgrades, and worsening inequality.

That said, the economic outlook is brightening:

  • While GDP growth estimates are still pencilled in at between 1.5% and 2% for 2018 to 2020, the rise in confidence gives a likelihood of materially better outcomes.
  • Domestic inflation remains subdued, offering scope for monetary policy flexibility.
  • We expect better fiscal control and growth to stabilise SA’s credit rating.

As we approach the 2019 national election there will no doubt be comments and cross-winds. This may be unsettling, but during my 28 years in SA good sense has ultimately prevailed.

Shew! If that does not encourage you, nothing will. Bad news will always be there. Just had lunch with British people and they are concerned about Brexit and would love to live here; how’s that? Andrew’s perspective lifts us from the gloom and places us in hope.

Do you do that daily where you touch the lives of Others?

Yours in Property.

PS – if you are looking for experienced and professional assistance with the home buying process, Contact Homeloan Junction – They take care of all the steps so that you can focus on what matters most to you.

HOME OWNERSHIP

In this blog, we cover an issue upon which I am biased. I admit that upfront so that no illusions are created.

The issue is full title standalone housing versus sectional title homes.

The recent FNB Property Barometer gives some insight into this phenomenon and we quote as follows:

The Sectional Title Housing Market Segment continues to outperform the Full Title Segment, although the latter segment has seen its average house price growth accelerate somewhat.

The FNB Sectional Title House Price Index has remained at a faster growth rate than Full Title of late. The Sectional Title House Price Index rose by 5.18% year-on-year in the 4th quarter of 2017, having accelerated from 4.96% in the 1st quarter of the year. 

The Full Title House Price Index, by comparison, showed a slower 3.95% year-on-year growth rate in the 4th quarter of 2017. However, its growth had accelerated a little more over the year than the Sectional Title Index, from a lowly 3.18% year-on-year in the 1st quarter of 2017.

Our panel of FNB valuers also perceived the Sectional Title market to be stronger than the Full Title market in the 4th quarter of 2017.”

Let’s just analyse this trend. What does sectional title represent generally? Secure estates with smaller homes on smaller stands and community living.

On the negative side, if you don’t like people, you’re too close to the neighbours. In addition, you become liable for the community rather than your own costs. So, as per our units in a Cape provincial town, you become liable to paint the whole complex when that is needed or the sewer repair even though your own toilet is working. Of course, you don’t really feel this as a good Body Corporate will make provision for such an eventuality. In my Mom’s case, the roof is still asbestos sheeting and this needs to be replaced at great cost and with sensitivity of those living below. The financial provision is building for this to happen and even the downstairs units are contributing to the replacement. Painting is another generic cost and gardens are contained in the operational budget. In essence, everyone contributes to the common good of the complex.

So why stay there and endure all these common costs? I would put to you that the major reason is the simple human phenomenon that there is safety in numbers. Older folk feel comfortable that having a friendly neighbour provides then with a point of first call should there ever be an emergency. But for the younger folk, having neighbours, especially good ones, just creates a sense of community that you can get nowhere else. The kids grow up together, the lifts to school are easier, and the sense of security and camaraderie is expanded as people live closer together.

So, it is not unusual that sectional title properties are more sought after than standalone houses. To be honest, I’m not sure this is a purely South African phenomenon. It may well occur elsewhere. Here are some of the reasons why:

  1. Community is a modern trend. We give away some privacy in order to live in community. I have a friend with a 3000m2 stand, who has planted fully grown trees so as to avoid neighbours. But he would be the first to admit that he is unusual. Firstly, affording such a property is the realm of the wealthy and secondly, not everybody needs such reclusivity. For many, the proximity of neighbours is sacrificed for the benefits of communal living.
  2. Expenses are shared in a sectional title complex. Painting, municipal costs, security, building insurance, and Body Corporate costs eg a burst geyser, are all co-borne. In other words, when we paint, I pay just that portion of my cost that pertains to my square meterage. So I don’t need to pay for my whole property but just for that portion that I “use”. That’s neat! The same goes for security. When you drive in Inanda in Joburg and you see those guard quarters at the entrance to the property, you’re looking at R20-30000pm for 24 hours guarding. In your complex, you get that but for a fraction of the cost.
  3. The case for security goes without saying. Firstly, you have it with everyone else but you also pay less and feel safer in a complex where there is movement around you. Nothing is fool proof as my friend’s daughter who was followed right into her complex will tell you, but there is a semblance of more security in a townhouse complex than on the open road.
  4. Sectional titles can be cheaper to buy and give a better return long-term than stand-alone houses. The reason upon entry is standardization. A 50 home complex has 500 common windows, 1000 similar doors etc so prices can be negotiated by the developer that pale into insignificance compared with your non-standard, fancy windows and doors in your architecturally designed home. This what you buy – similar design, cost-effective material and building costs and often, benefits like transfer duty included in plot-and -plan sales. Really, a great value proposition.
  5. Finally, a benefit worth mentioning in an ageing population [that’s you, by the way :-)], is that old age facilities accompany communal living. Where we live, Alzheimer’s centres, Frail Care and proximity [if not on-complex] to such facilities, is crucial to the buying decision and the value proposition of community living. High demand exists in these areas as global populations age beyond their time.

There are a few property types in the communal category that bear unbelievable common-sense. My uncle taught me that properties along a ridge, with a view, and properties along a shoreline, close to the sea, are scarce. Another is the golf course and eco-estates that have sprung up. The golf course estates of course now bear the water issue. Golf courses drink water so practically no more will ever be built except at the great expense of grey water reticulation which makes the stands expensive to service. Eco-estates will continue to spring up in many different forms as urbanites attempt to escape the pressures of city living. It is therefore fair to say that these estates carry a scarcity value that bodes well for good investment returns.

Compare these benefits with a stand-alone house. In this case, your security is your responsibility, your neighbours are “next door” rather than close by and every cost of the property is your own exclusively. You may be paying excessively for privacy.

Thus, sectional title complexes have carried value over the years and have proliferated as a form of property ownership.

Property ownership remains a definite source of wealth in South Africa. The fact that you own property, never mind the advanced financial engineering of gearing properties, remains a major source of wealth creation for most young people.

In this regard, Homeloan Junction is positioned to help you acquire property. Our advice, access to the free services of the banks, and our ability to negotiate credit terms that suit your pocket, mean that we remain a leading originator in the country. We have offices countrywide and can refer you to them with any need you may have. Contact us on www.homeloanjunction.co.za for a free consultation and pain-free mortgage finance.

 

Yours in Property.

DETACHED?

I loved reading John Loos’ Property Barometer – 2017. John, together with Jacques du Toit of ABSA , is one of the most experienced property market commentators in South Africa. His Barometers are both scientific and appealing. Bad news when revealed, but also good when the tide turns. I am always also struck by “what could have been” if not for a few negative factors. Our president, now for years, has featured in the “what could have been” column and none the least, last year. When we think how we came out the blocks in 2016 expecting 1.2%+ growth and how, despite the technical aberration of 2% in the 3rd quarter of 2017, we only have managed 0.7%, it is good to read John quite up-ish on the scientific numbers for House Price Growth.

Let’s quote FNB and then make some early-2018 points:

“2017 saw the FNB House Price Index growing by 3.7%, a slowing on 2016, and the 3rd consecutive year of slowing annual average price growth. We had expected a slower house price growth rate in 2017, with the country’s economic growth performance having stagnated for some years.

However, monthly house price growth has been accelerating recently.

 

2017 FNB HOUSE PRICE INDEX PERFORMANCE

2017 turned out to be the 3rd consecutive year of national average house price growth slowdown. From a multi-year high of 7%, reached in 2014, the FNB House Price Index’s average annual growth slowed each year, to 4.8% in 2016 and then further to 3.7% in 2017.

Based on 11 months’ worth of CPI inflation data, this translates into an estimated decline of -2.4% in real terms (adjusting house price growth for consumer price inflation).

However, from a low of 1.5% year-on-year house price growth in December 2016, the rate gradually rose to reach 6.1% in December 2017, further up from a revised 5.5% rate for November 2017.

In real terms, house price deflation that had occurred earlier in the year gradually dissipated, and by November we saw a slightly positive year-on-year real house price growth rate of 0.8%, house price growth moderately exceeding CPI (December CPI data is not yet available).”

Under the circumstances, this is truly good news! Could it be better? Of course, but given the state of the economy, we could have seen:

 

  1. A deeper dive of the real HPI with Inflation higher and Interest Rates higher, thus depressing markets into falling residential prices.
  2. Negative sentiment prevailing in the minds of Consumers with depressing Consumer Confidence.
  3. Even more destructive politics approaching the Elective Conference.
  4. A Full Junk Status with Moody’s making its final move.
  5. Drought in the Western Cape crippling the pearler of a run on property prices in the province.
  6. The practical collapse of the Eskom cashflows.

 

“Bleak”, would not have been the word to describe the economic landscape. You can only imagine.

 

Instead, we have:

  1. A 6%+ increase in House Prices in December 2017.
  2. Cyril Ramaphosa as the president-in-waiting.
  3. The Eskom board rejuvenated with Jabo Mabuza and Mark Lamberti [the two I really know, but I’m sure there is still much serious competence] in concert at senior level firing sham re-appointments of Koko and the like.
  4. Good news coming out of Joburg’s business community despite one of their own, being Steinhoff, toxifying the air.
  5. Mike Brown and the likes inviting the ANC President to re-engage Business as Pravin had envisaged the rescue before the Junk status nightmare.
  6. Clean-ups under way in Joburg and Pretoria as fast as possible.
  7. Our SARB and the FIC free of state capture and our Treasury pulled back from the brink. You just have to listen to smooth Gigaba to realize that and, when last did you hear about Nuclear?
  8. Late but not least, some action being taken by the NPA and AFU against the Guptas.
  9. A continued stay of execution from Moodys as regards their Negative Watch for a full downgrade.

Truth be told, if the Cape Town City Council had been one year ahead of itself with the drought measures, there would be much cause for celebration.

Not the best performance of our country but certainly it could have been worse. As I said in my first blog for 2018, I am convinced that CR’s leadership will shine through and that we will see rapid change taking place in critical areas starting [with an excellent start] with Eskom.

It remains for us to be focussed and positive, using every scrap of good news to motivate our actions and be successful.

In closing on the Title’s question, is there a possible detachment between rising house prices, which generally indicate a lively market, and consumer confidence? It seems counter-intuitive to me as over the years. consumer confidence has been the main driver but there is a thing developing called “-fatigue”. Corruption-fatigue, Bad News-fatigue, Politics-fatigue, Negativity-fatigue etc. People just gatvol of everything being down-and-out and needing to just get on and live their lives somewhat normally. If you’re moving from Bloemfontein to Joburg you could sell your house and “rent for a while until things improve”. However, could it be that people are saying “this is as good as it gets so let’s just get on with life”, or, “now is a good time to buy”. Either way, unless December’s number is just a statistical aberration, there seems to be an inexplicably good rise in prices which even has John Loos excited. If I’m right, agents and originators score. If I’m wrong, I’ll apologize. But, for sure, we will have a better year than last year – that I’d bet on.

Yours in Property 2018.

THE ELECTIVE CONFERENCE

Well, it’s happened!!

Just sitting here listening to the de-brief of what took place has caused me to rise and write this blog immediately.

I am still to write a synopsis of the property market in 2017. Those who have been reading me during the year know that I will be positive. Not in the sense that that is the stance I take as a rule but rather, that the end of the year is better than expected after our president turned the Treasury on its head for the second time in as many years. In doing so, he ignored any common sense that may have prevailed locally and internationally. His view was his view, no consultation, no permission just Guptanomics applied brutally. In doing so it feels as though he cooked his goose and has paid the price. In his own words in his scathing last speech, he is a soldier and he will march on. Man, has he left a legacy of unity at the cost of principles, and best of all, free education for all [well, 90%], which we cannot afford! Guess who is going to pay for it? – the wealthy and the Poor.

But this Elective conference which I must say has delivered the candidate I prayed for, has delivered a mixed-up unity like none other. There are people in senior Secretarial positions whose own province could not stay out of court for branch and PEC electoral distortions. Other people who have played the game of politics for politics itself – the amassing of votes in a democratic society but who probably have no one in mind but themselves. Self-centred individuals who triumph on the backs of well-intended people.

KZN could implode. What that means I do not know but I’m sure unless the leaders of the ANC pull together, that province could well continue with their low-intensity civil war. My sense is that whilst the Eastern Cape is bereft of competency and leadership, KZN is bereft of values as well. Without values, killing your tender competitor is sanctioned and if that means revenge killing, so be it. Heaven help the leaders there as they take unity to the ground and make it happen in the hearts of the people. I cannot help but think Jacob Zuma has set alight the province where he scored his greatest victory, namely, to quell the warring IFP/ANC factions in the 90″s.

The one thing I have seen all my life is that people follow leaders. Watching Colin Maine, the ANCYL leader, it was amazing to listen to him change his tune and welcome the unity that the appointment of Cyril Ramaphosa brings. What rubbish! He hated and slated the man in favour of his beloveds – jz and ndz. But how fast the change occurred as he saw his salary and his prestige swiftly flowing out the door. Will he survive the next election? I don’t know but I must say, I have seen the same shift of position happen often in Corporates. Human systems adapt to leadership. Leadership can lift the games of their followers. Or, leadership can sink their followers to the lowest common denominator. Jacob Zuma has done just that and in case you thought he’s going away, remember, he is still president of our beautiful tortured country.

So a couple of points for the property market:

  1. The Rand strengthened prior to the conference on the buzz that Cyril Ramaphosa would win. Now it has crashed through barriers last seen 2 years ago, especially to the British Pound.
  2. This strengthening movement is probably over-stated and we will need to see if it continues and then sustains. It will literally take the first few words of the new President of the ANC to shift it one way or the other. Even as President of the leading political party in the country, his stance will determine the short-term value of the Rand. If he favours the country overtly and the ANC secondly ie in private discussions, he will win us kudos.
  3. We have a downgrade from Moodys in the wings. I think Cyril Ramaphosa has just won us a reprieve.
  4. The downside, for those who wanted to win the 2019 elections, is probably that the ANC will consolidate and even win back metros they have lost. Joburg, prepare yourself for change. It will take a huge amount of scepticism and a massive amount of compromise with the zuma faction, to foresee the ANC losing in Gauteng again.
  5. Speculation aside, the win by Cyril Ramaphosa is good for property:

– The 1% growth that we lost out on this year will materialize as 2% next year.

– The drain of the SOE’s on the economy will begin [very slowly, however] to recuperate.

– It will be very interesting to see if anyone goes to jail, but I think there will be some sacrificed lambs who will do time to satisfy the populace.

– When the economy rises, jobs will be prioritized and COSATU will be manifested in all their glory in the new-birth of the tripartite alliance. That happy band of vote-winners will be in unison again. Tonight’s manufactured unity will be realized and expounded to the Press.

In summary, property will benefit and rates will decline as long as the Rand holds onto its new-found value. Slowly but surely, property will rise in price. Don’t write off that Gauteng, on the back of positive politics in a winning streak and with the fresh feel of abundant water, don’t be surprised that prices rise well above the average of the last three years. “Prepare to meet thy boom”, was how the late de Kock, the Reserve Bank Governor, expressed it.

What a Christmas present for South Africans of every walk of life! Jobs will be at the centre of a conference that Cyril Ramaphosa pulls together with Business and Economists and Others. Prepare for a Grande Plan that mobilizes for jobs – probably the most precious thing besides water in our economy at the moment.

More to come but in the meantime,

Yours in Property

5 Truths about getting a Homeloan

For many South Africans, applying for a home loan can be a stressful procedure. This is perhaps the biggest financial investment you will ever make. There is much that South African buyers don’t know about the process of applying for, and the responsibilities that come with a home loan.  As a first-time buyer, do you know what questions to ask?

Is it difficult to apply for a home loan?

First-time buyers find the challenges of meeting the criteria daunting with what seems like endless paperwork, red tape and rising property costs. However, once you have all the information about the home buying process at your fingertips, you will discover that the process is relatively straightforward and simple.

Whether you are a first-time buyer or you are seeking to purchase a second property as an investment, Homeloan Junction can help you by putting our wealth of resources at your disposal. Here are 5 home truths about getting a home loan that will get you well on your way to finding that dream family home.

  1. Create a good credit record

Firstly, it is important to have a good credit record before applying for your home loan. The banks are unlikely to approve a loan for first-time applicants if there is no credit record or history of being able to pay consistently. Even if you have saved for a deposit, your application may not be approved simply because you have no other loans. So, before putting in your application for a home loan, spend some months creating a good credit history by paying smaller loans at the right time, like your cell phone or clothing accounts. Obtain a free credit report online and check whether you have used enough credit products and whether you have been a reliable borrower. If there are any errors in the report, request to have them fixed so that you can improve your chances of obtaining a loan.

  1. Decrease your monthly disposable income

Banks are also not willing to offer loans to high risk debtors. Decreasing your monthly disposable income by reducing non-essential debt and where possible paying off accounts will help your chances of home finance approval. The most important thing is for you to pay your accounts and outstanding credit card balances reliably and on time. Do not close accounts which you have just repaid, keep them open and use them.

  1. Deposit preparation

A home buyer is expected to contribute to the purchase of the property by paying a deposit. It determines the loan-to-value ratio, which expresses the loan amount as a percentage of the property’s sale price. The larger the deposit is the lower this ratio is and the less you will have to borrow.  This will increase your chances of home loan approval and help you save on interest payments as banks can then offer a lower interest rate. That is why it makes sense for you to save for a deposit to use towards the purchase of a house. Use our savings calculator to work out how much you need to save and for how long, to save for a deposit for your home loan.

  1. Work within a budget

It is best to consider a property that is within your budget and that you will be able to repay. While your first home may not be the mansion of your dreams, it is important to ensure that it meets all your current and medium-term needs. In this way you will be able to afford your family home without getting into serious debt. At Homeloan Junction, we provide services and online tools that can help you plan ahead of time. Use our home loan calculator to decide on total costs and assess affordability and whether you as a first-time applicant qualify for a home loan. We also offer innovative alternatives to traditional bonds which could see you paying far less in the long term and paying off your loan over a shorter period of time.

  1. Make a formal enquiry with Homeloan Junction

At Homeloan Junction we make it our business to keep the home loan application process as simple and straightforward as possible. Talk to us today about how you can successfully secure your loan. We can help you with all the documentation needed to make a formal application at a bank. For more information on whether you meet all the criteria and what you can do to make sure you qualify, contact Homeloan Junction today.

Real house price growth 2017

The FNB Property Barometer of 1 February 2017 is a real bundle of joy. It starts, “2017 starts on a very weak note with the FNB House Price Index narrowly avoiding year-on-year deflation.” It continues to report that “the FNB HPI for January 2017 rose by a mere 0.3% year-on-year having already been in month-by-month seasonally adjusted decline for the past 6 months.” And for the final nail, “in real terms…….. the index recorded a year-on –year decline in December 2016 of -5.4%.”

You know, you can’t talk bad news up but the benefit of only having to report the facts is that you just need to state them. For those of us with jobs in Sales and businesses employing tens of people, bad news needs to be the spur for success. It’s so important that I need you to read this again: “for those of us with jobs in Sales and businesses employing tens of people, bad news needs to be the spur for success.”

In that spirit I write this blog.

The House Price Index [HPI] is a measure of the periodic increase of house prices over time. Different banks measure the prices differently, but all give very similar results at the margin. Normal measurement is year-on-year and that, including inflation and excluding inflation. The bottomline is that inflation erodes value so a 10% HPI increase with a 12% inflation means we’re going back at -2%. The HPI is more than a measure of simple house prices and the economists are quick to explain that slow house price growth is symbolic of economic pressure. Given who is buying and selling houses, the main indicators would be employment and interest rates with the huge cloud of Confidence overarching anything the consumer does long-term with their money. You may take your family for a breakfast even if your job is feeling insecure but you sure wouldn’t move to a new house under a similar cloud. Into the facts of employment and rates, we factor in such issues as impending downgrades, shenanigans in parliament, negative news reports and such lousy extraneous factors as drought and low commodity prices. So HPI measures so much more than just a price increase as we read the numbers.

Beginning with drought and commodity prices, let me make a few encouraging points:

  1. The drought has practically been broken in central South Africa. Having the dams full should not be underestimated even though certain parts of the country may not have had all the rain they need. In addition, the crop is only about 3% up on last year because many farmers delayed planting or lost plants before the rains came. So full dams may not warrant massive relief but, as I so often use the term, if I was offered full dams in June last year, I would have taken it! Of a truth, though I sound a little blasé about the rains, I believe their coming is a miracle. So let’s assume the farmers have more maize, therefore we import less and that they have more food to sell so prices come down as everybody is now waiting to happen; what a great place to be in comparison. That’s good news!
  2. Commodity prices have risen. Yes, Donald Trump was a catalyst but I would imagine that global stockpiles were depleting and the China crash of last year has somewhat normalised. If you had shares in Kumba or even Harmony Gold, you have become rich in the last 6 months. Huge increases have occurred. The other commodity that affects us not as exporters but rather than importers, is Oil. In 2015, Clem Suntner was concerned about Oil going below $30 and causing huge societal casualties in oil-producing countries. Speculation aside, I put to you that it is not charity that has caused the price to rise but rather a control (though it has proven very difficult in the cartel) of supplies coupled with an expectation of improved economic activity in developed countries. So commodities have improved and for SA that is really good news.
  3. The 1%+ growth rate recently posited in the Budget speech was trashed in a recent article I read. The gist of the argument is that Treasury has undershot their growth projections on a number of occasions. All I have to say is that both ABSA and Standard also projected 1%+ in their forecasts. Therefore, added to the good news above, I am fairly confident we will see better growth this year. FNB in the Property Barometer, indicate that this year could be a year of two halves in the sense that the HPI also picks up towards the end of the year. The point for me is that we’re coming off a base of 0.3-0.4%. Surely this travesty is beatable this year? The downside remains a downgrade and any negativity that comes out of the looming cabinet reshuffle. On both these counts, you and I need to “accept the things we cannot change”.
  4. The DOW continues to soar and is being talked up in the States. Today’s speeches by Trump may stymie that a little as he stumbles on his tax and healthcare promises’ timing, but, it does seem, America is in for a good growth spurt. That’s exciting and let’s hope Warren Buffet et al are right.
  5. I make the point again, I worry more about tightening credit than I do about flat house prices. By that I mean that of house prices move to such an extent that affordability and value come into play, bankers may tighten credit approvals. Flat house prices and level interest rates coupled with reasonable increases in salaries, mean that affordability ratios improve. So the current market may not be the best scenario for sellers, but buyers will be better able to afford their bonds. That’s great for sellers, buyers and anyone with an ad valorem commission riding on the transaction.
  6.  I sat in a board meeting today and a large listed company’s economist made this statement in their Funding report: “It is anticipated that the interest rate cycle has peaked and that the SARB may begin to cut rates this year.” From their mouths to SARB’s ears! I have made the point before that rates have been well-managed but have been rising at a time SA Inc can ill-afford it. I believe that whilst there has been an imminent threat of inflationary pressures [food, fuel, weakened Rand], the SARB has been ahead of the curve, in particular the USA curve, of raising rates. This confirmation from a highly regarded Economics unit is very well received. I also think that the Elective year will be agood year for a rate reduction/s to occur. Though not common for the ANC-led government, it would do nobody any harm politically and would certainly appeal to the hard-done-by middle class. Watch this space, is all I’ll say.
  7. Finally, the Rand must be dumbfounding the economic fraternity. R12.90/US$ is a really good number when you consider where we have been and how we felt about it at the time. As I write. It sits at R12.99. This offsets the Oil price increase and the cost of many other imports. Sadly, Mr Gordhan has used the respite to attach more taxes to the pump price of fuel. But as for the beloved Rand, good on ‘ya!

It’s good to have some positivity to hang on to. Not conjured up, just a statement of facts; sometimes re-positioned but certainly quite feasible. As usual, so much depends on leadership and this country’s political and social leaders have much for which to be accountable. The SOE’s, PRASSA, SASSA etc must not be allowed to cock it up – wasn’t it good to see PRASSA governance kick in and dismiss the acting-CEO immediately?

So take heart. All is not lost and rising house prices may well be lagging the curve of economic improvement. In the final analysis, whether you read this or believe this blog, your energy, optimism and sheer hard work has got you this far and will take you through. Nothing changes that rule for successful people. As the quote by Leonardo da Vinci goes:
It had long since come to my attention that people of accomplishment rarely sat back and let things happen to them. They went out and happened to things.

Yours in Property.

BUDGET 2017

If you asked for a word, I’d say: “Neutral”.

Without all the detail in which I’m sure you’re well read by now, only one highlight stands out for property and that is the raising of the threshold for properties that are valued at R900 000 (from R750000 currently), or less which will not be liable for transfer duty. A 20% increase “gift” to spur first-time and low-income house ownership.

As for the rest of the budget, don’t confuse “neutral” for a lack of interest. Of course, he raised the bracket for R1.5m and above to 45% but that could be seen as part of a progressive tax strategy. And then, the infamous “sin taxes” which will always be there to make wine more expensive and balance the budget. What he never did was raise the thresholds for the middle income which makes this group one of the most taxed in the world in total. That saving for SARS is estimated to be worth about R12bn and is simply increased taxes as a result of inflation-adjusted increases. In other words, if you get an increase equal to inflation, you will earn less after tax in real terms. Sad but true. Beyond that comment, the usual massive increase for education is a valiant effort by government to educate the young people for leadership and technical roles in the future. To be honest, education often feels to me like throwing good money after bad when I hear how many schools behave and/or perform. Tragic that we are extremely poor in Maths and Science and that we still have mud schools; surely inarguably acceptable with a budget of R320bn per annum.

In all Minister Gordhan attempted, he needed to fill a R28bn Income hole. He did this with a slight rise in borrowing but is still above the global benchmark of 3% of Debt to GDP. This R2tn debt, added to spiralling government job counts and cost is really precarious if rates [cost of funds] start to rise generally, or in the event of a downgrade. It was remarkable how, after speculation of an impending reshuffle, Tom Moyane’s constant niggle and Brian Molefe’s swearing-in, that the Minister could still assert that he will continue to represent SA Inc as good for the Ratings Agencies to not downgrade us. How motivated would you or I be under similar pressure?

So what Gordhan did not do or say is good. He did not shrug off the Agencies and borrow to appease “radical economic transformation”. He did not cut social welfare, security or education. He did not follow suit on the radical use of the term “radical” as we had heard in the SONA and he did not jitter the markets. Amazing, in round figures, the Rand lost about 1% in 24 hours and pulled back below R13/USD in the next 24 hours. And we even got a small [though short-lived ] petrol increase! All-in-all, a fine achievement for property.

Yes, it could have been worse but we can expect growth to continue to improve to over 1% this year. As I hear that the Vaal Dam may overflow soon, it would seem things are turning in our favour. And commodities seem to be sustaining their price rise. But the Minister can do little more for house prices to rise. He needs help from No1 and his cohort of Cabinet ministers. From that side of the ring, the worst we can have is a damning, harmful cabinet reshuffle in which key ministers are punished for their lack of political support. Harmful because it will crush Confidence and lead to further loss of jobs. That, more than anything else we can foresee, would be bad for property. But, as I have said before, I believe that we have managed interest rates well and I get the sense that no increase in SARB rates will occur this year. If we can keep a strongish Rand, behave ourselves in an Elective year and enjoy some natural benefits like rain and ore prices, we could see things improve. A long shot for which I stick my neck out.

So, from Homeloan Junction’s side, we continue to affirm this country, the resilience and common-sense of her people, and the abundance of her natural resources. As such, we remain positive that the year will trend positively. You can be sure, in that spirit, that we will be here to service your homeloan needs.

Yours in Property.

 

IMPORTANT PROPERTY INFORMATION

Sounds very formal but it isn’t. Property is often compared with other forms of investment and kind of comes out in the middle.

Last year, for instance, and believe it or not, Bonds {not mortgage bonds but government bonds] were the best investment in the country with a return of over 15%. Between your unit trust and property, you stayed about even and interest of up to 8.5% still yielded about 6% after tax. So, not a good year for property. Unless your grandparents left you that little 46m2  house in Clifton that’s selling for about R46m 🙂

With that introduction, let’s look at two trends that are emerging.

Build vs Buy

This perennial question is more of a trend than a fact. At times it is less expensive to build than to buy and this fact is usually driven by inflation and sentiment. In my experience, the rule of thumb is building is more expensive than buying. The problem of course, is that we’re never satisfied with the house we buy and always want to improve it “to our liking”. So, from a re-paint to an added room or paving, we spend more than we might have spent on a new house. Probably, if you identify with this, a plot-and-plan is your best bet. Here you get to agree most of the plan with the contractor and then to add a few details that make the house more what you want.

Absa and FNB have recently researched the latest data and reveal that building a new house can set you back about 30% more – averaging a whopping R629 500 extra cost –  than buying an existing home. According to them, this cost gap is the largest recorded since 2003.

Rising inflation in building costs and then the increasing cost of vacant land is at the heart of the problem. Remember, vacant land is not so vacant and the cost of so-called “services” is rising dramatically for developers. One often hears figures of R300-R500000 per plot to provide sewerage, water, roads, security and electricity. Against this backdrop, house prices are rising very slowly.

The average nominal price (before inflation is stripped out) of a new house increased to R2.02 million while an existing home of the same size increased to R1.39 million, according to Absa’s figures for the third quarter of 2016. ABSA’s economist, Jacques du Toit says the price trends on new and existing homes infers that it’s 31.2% – or about R629 5000 – cheaper to have bought an existing home than to build it from scratch. FNB’s data also shows a similar trend, with the replacement cost gap of a home in the fourth quarter of 2016 increasing to 30.4%, which is well above the 21% recorded between 2014 and 2015. The cause for all of this is building costs that continue to soar, with Absa’s data showing that the average building cost of new housing, constructed in January to November 2016, increased by 6.4% year-on-year.

Just for our interest and according to John Loos, FNB’s property economist, the last time the cost of building a new home and buying an existing one were roughly the same, was in 2007 when house prices grew at double-digit levels and the home building boom was in full swing.

All of this in comparison with house price increases that are just avoiding [the really good news!] deflation.

As an equation to compare:

Cost of an existing house + Transfer costs + Costs of alterations = Total cost of an existing house VS
Cost of a new house [Often there are no transfer costs and there should be no alterations]

Think about it carefully before you decide.

Rental Returns

We have often discussed the benefits of a depressed market for landlords. If you need to sell your buy-to-let, it’s bad news but for those renting, depressed prices often mean better returns through higher rentals. This takes place primarily because house prices depress when the economy is sluggish. At that stage, people sell to raise capital and prefer, or need to, rent for a while. More tenants means more rent.

Rents are driven by supply and demand. People who can’t afford a price and may even be battling to get a bond, may find that renting in a select area may be preferable to buying in a less preferred area. Sandton and upmarket areas of Cape Town come to mind. Quoting Charles Vining, managing director of Seeff Sandton, gross rental yields of up to 8% in Sandton are currently possible, especially in rental stock at lower price levels. “A bachelor or studio apartment in Sandton central will cost around R7 500/month. A one-bedroom apartment can be picked up for the same price or even less in suburbs like Bryanston or Houghton.”

The rental price range most in demand along the Atlantic Seaboard and City Bowl is between R20 000 and R30 000 a month, for two- to three-bedroom units, says Dinis Martins, chief operating officer of Seeff Atlantic Seaboard & City Bowl. Gross yields of between 6% and 7% are achievable in the active, buoyant market of the Atlantic Seaboard and Cape Town’s City Bowl, says Martins. He expects the same to hold true in 2017.

In my experience, capital appreciation is at the heart of a potential landlord’s buy-to-let decision. Seldom mentioned is the increasing cost of services – rates, maintenance, and levies – which erode your rental return. Those of you blessed to have purchased many years ago have enjoyed good returns in, say, Sandton over 10 years or so. However, what has now happened is that new complexes have been built with all the glam of modernity. They offer good rental options, beat the traffic and are proving desirable. Therefore apartments that are a little tired need renovation and have begun to stagnate in capital growth. At the same time, rents have peaked in the complexes. The net return from the proceeds of a sale placed in a bank becomes a real option. Alternatively, selling the peaked unit and buying into a modern complex is also a way of perpetuating your rental income. A new 2-bed, 2-bath unit in Cape Town’s southern suburbs will set you back R3m and give you a gross rental of R16000, for instance.

My view always is that instead of debating buy-to-let, you should have a unit or two in your portfolio. And remember, Trouble Equals Distance Squared so be sure to buy a rental unit where you can “touch and feel it” – nothing like a burst geyser in a Cape Twon apartment while you’re living in Joburg.

If you’re in the market for a home for own use or as an investment, why not speak to your local Homeloan Junction consultant. You will find they have great expertise around bond and property costs and could refer you to excellent estate agents who will help you make the right decision for you and your family.

Yours in Property.

WHAT ARE PROPERTY TRANSFER COSTS?

Buying or selling a property is probably the biggest financial commitment you will ever make in your lifetime. But naturally we can get so wrapped up in emotion when it comes to buying/selling a property that we rarely take the time to research other costs involved. This is why we strongly believe that it’s crucial to fully understand all the factors that go into influencing the purchase, no matter how overwhelming they might seem at the time.

When you decide to buy a property, the conveyancer or transfer attorney will start to prepare the transfer documents on receipt of the title deed, personal details and confirmation that all conditions have been met by both parties. The attorney will then start the process to register the transfer of the property in the Deeds Office. The transfer costs that you will have to pay are made up of four main fees that you will need to pay to the transferring attorney who in turn will pay the respective parties, including themselves.

The transfer costs are as follows:

1. Conveyancing fees

These fees are payable to the transferring attorney for carrying out the legal procedures required to change the ownership of the property into your name and for generating all the necessary documentation. The amount is calculated on a sliding scale based on the purchase price of the property and is the only one of the transfer costs which is negotiable. In the event of the transaction being repeat business, then attorneys may consider a reduced charge. It is worth bearing in mind that conveyancing fees are subject to VAT.

2. Administration fees

This is a set, non-negotiable minimum fee paid to the transferring authority for costs relating to the Deeds Office search, to verify the respective parties for FICA and for petty cash expenditure such as postage. The FICA verification has to do with compliance with the Financial Intelligence Centre Act which requires the attorney to verify the identity and address of the parties and in the case of you, the buyer, the source of funds for the transaction. VAT is also applicable in this case.

3. Deeds Office fee

This transfer cost is paid to the transferring authority which will then pay this over to the Deeds Office. The Deeds Office requires this fee as a result of their having to update their records. The way it is calculated is according to the purchase price and is neither negotiable nor subject to VAT.

4. Transfer duty

This tax is payable on transfer of the property and is paid to SARS by the transferring authority. It is calculated depending on whether the property is registered for VAT or not. No transfer fee is required if the purchase price is below R750 000. A property exceeding this amount will require a transfer fee calculated according to a sliding scale. If the property is VAT registered, instead of the transfer fee, VAT becomes payable on every rand of the purchase price calculated at 14% of the purchase price.

5. Clearance certificates

There are also costs that you, as the buyer of a property, will have to pay related to clearance certificates which are arranged and collected by the transferring authority. They will then pay SARS for the tax clearance certificate and the local authority to verify that there are no outstanding rates and taxes payable by the Seller. Without these clearance certificates as proof of payment, the transfer cannot go through.

So if you are in the process of buying that special home, take heed of what transfer costs are applicable to your case.  We believe that what is crucial at this junction is to choose your estate agents with care and make sure your homeloan consultants have expert knowledge of local conditions, trends in property prices and the resources to provide you with all the facts you need to make important decisions. You need to partner with a company that will put your needs first, honour the relationships you have set up with an estate agent and provide you with a sense of belonging to a dynamic team. Then you too could be well on your way to purchasing that special property for you and your loved ones.

 

AFFORDABILITY

We’re in that time again in the business cycle, when affordability begins to come into question. So, let’s question it.

I want to put the negative on the table first so we can get it off the table quickly. Depending on your measure of doom and gloom,affordability is affected by many factors that work together. For us today, let’s make them Inflation, Interest Rates, and Employment. If you have a job, are assured that it is stable, have low interest rates and live in a low inflationary environment, then you haveaffordability. In our environment, inflation is out the range at 6.3% average this year, rates may be about to rise and jobs are not secure. Therefore, on the negative side, Affordability is in question and therefore fewer houses will be sold as less bonds are financed by ever-risk mitigating banks.

NOW I’VE GOT THAT ON AND OFF THE TABLE, LET’S SEE SOMETHING THAT IS INTERESTING. IN FACT, EVEN IF THE RATES GO UP SOON, THEN MUCH OF WHAT I SAY WILL STILL STAND.

On the positive side, a September 2016 ABSA Property Market Overview, led me to thinking. It said:

– Average nominal house price growth in August 2016 was at its lowest in 4 years, year-on-year.

– Nominal house price growth is to remain under downward pressure in the rest of the year and into 2017.

Against this backdrop, those of us who have been in the property industry for a long time will recognize some interesting signs. The banks are strict lenders of credit but frankly, at this stage are still lending and at significant loans-to-value ratios. The interest rate rise has been managed superbly by the SARB – you can debate if raising rates has been necessary but you can’t debate the intelligence, independence and stability of the SARB. It has really managed a difficult process in the whitewater of the global economy with due diligence and clear communication. So that said, if the rate rises this week, it will continue along similar lines – my premise is that it will not rise and if it does, will not have a negative effect. On the other side of the ocean, strong consensus is that the FED will not raise interest rates given the soggy USA economy. So let’s assume rates stay the same there and here. As regards inflation, we do have it and it must be dealt but if the Rand remains stable below R14.50 and Oil remains <US$50, it will help curb further Rand declines. So let’s assume the Rand trades in this current range with a blip, make that “serious blip”, around a possible downgrade. Then Employment is about as bad as it can get in the formal [read: mortgage borrowing] sector. Certain industries, Steel especially, are under the cosh but generally, Mining, Manufacturing and a few other sectors, like Property, are doing fairly well. [Please believe me, given the stuff of our politics, EU/British politics, Japan’s economy etc, we are doing fairly well.]

So we have Interest rates stable or well managed, Inflation hopefully will peak and decline a little and Employment will remain soft but stable. If that is true, then Affordability comes into play. You see, cost prices of houses are declining. Therefore loans-to-values will increase. Therefore there will be a few happier credit managers around the place prepared to take a better view of your customers’ mortgage application. Affordability will kick into play – all of the positive, easy-to-feel effects of a Consumer more capable of paying for houses whose prices have decreased. Now that’s good news.

As always, I like to stick my neck out on these issues and if you asked me what the biggest risk is, well, it’s the downgrade of our country. Sad but true. However, many experts believe it is factored in and shouldn’t present a major change in the medium-term. In the short-term, it will feel like a blow to the financial Solar Plexis but we will survive and come through it.

There is another fact that is a driving force of much that is our economy – the Middle Class. Here is an article from Business Tech copied which makes good reading:This is what it means to be middle class in South Africa

There is cause for hope! Watch what you read and distinguish the Noise from the Truth. Watch the new municipalities perform as best they can in the next 5 years remembering they account for 60% plus of our GDP. Watch politics play out but don’t let mind-games play you. Focus like your business life depends on it.

I was reading about a Morningside development this morning. Darn good value. I read some innovative Cape Town property deals last week. Very clever and financially effective. At Homeloan Junction we are determined to understand and then remain positive – who knows but that my scenario above, buoyed by the growth of the Middle Class, does not become our experience and we benefit from improved Affordability at this time in our Mortgage cycle?

Yours in Property.