IMPORTANT PROPERTY INFORMATION

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.

Jack Trevena

Jack Trevena

With over 30 years of experience in the banking and home loan industry, my hope it is share what I have learnt over the years with my blogging community, inspire conversation around the subject and in the process discover unique insights into this ever changing environment.
Jack Trevena

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