Real house price growth 2017

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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

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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

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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 THE EXPERTS SAY

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I’m sure you tire of me sometimes. So, as a direct copy which I don’t often do, I want to expose two articles for a re-read if you’ve seen them already. The credit therefore, belongs to the experts who are quoted and to FIN24 for bringing the news and views to us.

John Loos talking about a “slight stir” is really good news. We know about the levelling of prices with the exception of one Province, but if the banks can keep their sense of credit and the economy can give us the 1%+ that is likely, that may even grow into a “rustle in the trees” for every estate agent. What I certainly can tell you where I stay is that there is no stock and a house my friend bought one week ago for R2.5m was on the market for one week and had four other buyers behind him. Another friend bought a stand one year ago for R500000 and turned down offers early in January for R300000 more. Finally, my conveyancer friend is still really busy. That’s all my friends [just joking!] but it feels like a rustle in the trees to me.

The views of icons of the property industry are extremely interesting. These are men who lead massive businesses, are professionals with years of experience. Their views are paramount.

Enjoy the read………….

‘Til next time!

Yours in Property

2017: SOME THINGS TO WATCH

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You remember when we talked about 2020?

Hindsight is 20/20………

20/20 vision………

Space station 2020……..

I can remember saying that I would be 65 in 2020. When you’re in your Twenty’s that’s a seriously long time.

Well, it’s almost upon us and we’re still here. But in the meantime, 2017 has its own interesting features that may unfold. Last year, Clem Suntner, in whose shadow I do not even stand but who I read every time I see something, wrote about 10 flags to watch in 2016. He defined Flags as trends that change the game.

They were:

–       The oil price

–       Global temperatures, floods and droughts

–       The US Federal Reserve Bank

–       The Chinese economy

–       The war in Syria

–       Vladimir Putin

–       The American presidential election

–       A global pandemic

–       The municipal elections in South Africa

Let me attempt to sum this up for you with 2020 hindsight. The oil price has turned the corner, we had a record-breaking drought, the FED is raising rates while the world has accommodated the Chinese growth rates, the war in Syria has intensified tragically, Putin seems friendly with Donald who will be president of the United States of America, the Vika virus has been halted and the SA political coalitions are holding in the first 150 days. But wasn’t Clem right on the button! I have been quite facetious to summarise his Flags so tritely; much more can be said as many of these trends have indeed re-shaped the game. By the way, with 2020 hindsight, Clem missed Brexit.

I would like to position a few things with you for 2017 that could impact our property market. Call them some things to watch:

Global interest rates

My sense is that rates across the globe will begin to rise. It would seem that there will be carefully orchestrated interventions by the central bankers to ensure that economic growth is not harmed but it would appear that the low-rate [read: close to zero] party is over. Any global growth in existence is fragile at best and brought about by rate and money easing of historic levels after sub-Prime. The hangover will need to be nursed with tiny doses of interest rates and absolute economic circumspection around the USA, Europe and other trade blocs.

In SA we will be part of this rate rise but I would not expect more that 0.5%. I must say that I have no economic base for this projection but my sense is that in an Elective year with green shoots of GDP growth, we have already pre-emptively raised rates and therefore will need little extra to hold inflation in trim.

SA growth

SA growth, as I mentioned in my first blog in December, seems set to rise. If Minister Gordhan is right at 1.7% we will not recognise ourselves for good news. But, as I also indicated, I would take the ABSA and Standard Bank projections at circa 1% with pleasure. You won’t need to watch this trend, you will just feel the lift-off of economic activity and doses of better news. Of all the things we need, reducing of Unemployment would be the most welcome consequence.

The FED vs Trump

This one is core to much of what I sense for 2017 economically. Trump shocked the world. For some the clown was in charge of the circus but for others, America would be Great Again. The stock market has heralded his policies for growth and tax reduction which remain vague, repatriation [if I may term it that?] of industry and his willingness to fund defence, infrastructure and the like. The FED, following the long-accepted <5% Unemployment Rule has raised rates but has also made it clear that it envisages 3 X 0.25% [probably] rate increases in 2017. Seemingly now, this stance which is so contrary to the past 9 years, is to curtail the Inflation damage that may be caused by Trump’s fiscal gusto. Time will tell who wins what may become ugly disagreement and simply muddy the waters of global economic stability.

The EU break-up

With tongue-in-cheek, I made the point that Clem missed Brexit. But, what we all missed was the EU coming under pressure as Italy joined the referendum chorus together with the Scandinavian countries. The former is slightly bankrupt, but the latter are very stable and significant. All are staring down the Immigration barrel and with as yet unmentioned Germany, taking the Christmas brunt of that concern. If you listen to Nigel Farage, ex-UKIP leader, the end of EU is nigh. However, the show’s not over yet and much needs to happen, especially with Germany and France standing firm, to dislodge the most powerful economic union on Planet Earth.

The relationship between Britain and the USA, Russia and the USA and the USA and China will all be factors to watch as the EU story unfolds.

Oil and Nuclear

I have placed these two together only because they are Energy related. The Oil price is on the rise as OPEC has finally garnered the support of the 10 non-Opec oil producers and agreed that production will be cut back in order to increase the demand and therefore the price. So from $32 to $56 we go. Locally, we can expect up to 50c increase in Petrol and 40c increase in Diesel in January. For the world, excluding America which will have a surplus of Oil at current prices, this means Inflation could rise. But for us there could be a precarious balance between a weakening Rand as and when the US$ strengthens and the rising cost of fuel.

Then there is our question of Nuclear. The final properties are being bought at Thyspunt, between Oyster Bay and Cape St Francis, to secure the area around a nuclear site which was identified by Eskom about 30 years ago. The RFP has been issued. On the other side, Kusele is coming on stream at twice its original cost and with Medupe 6 fired up, we have a welcome excess of electricity which we are able to sell to neighbouring countries. The R1tn for Nuclear will prove more obscene if it gets the go-ahead but this year could be interesting in this race to power.

The Elective Conference

Talking about a race to power, the Elective Conference [EC] will have taken place by this time next year. Dhlamini-Zuma, Ramaphosa and Mkhize seem to be the frontrunners and the knives are already out. One knife that hangs over proceedings is the Sword of Damacles, the threat of good opposition politics in coalition power actually succeeding in major metropoles. The ANC must be aware that good government by the People, for the People could in fact unseat their majority in 2019. As unthinkable as that may be, there could be a palace revolution of sorts at the EC which turns the tide of ANC-led government. It seems impossible, but watch this space in 2017.

Volatility and the Upside

There is no doubt that as much as I can posit the insights above, nobody really knows what will happen. You need to get used to volatility in every sphere of life; it is here to stay. [Remember we survived the Chinese stock market collapse one year ago, didn’t we?] The stock market will certainly reflect volitility in see-saw activity but, I believe, will show an upward trend overall compared to flat-lining this year. In the States, an interest-led upturn will be replaced by an earnings-led market and some speak very bluntly that the stock markets are over-heated at near-20000 levels.

In SA we will have another stormy year in politics starting with speculation around the Workers Association Union civil trial in which Thebe Maswabi has cited President Zuma in the initiating of a “fake union”.

What I do sense, against all the naysayers, is that property will be better in 2017. What we need to understand is the fundamental shift from standalone housing in favour of small apartment blocks and the continued demand for walled estates. Older homes on large plots are not the order of the day but ‘complexes’ remain popular. In the Western Cape, land included, it would seem that R30000/m2has become the going rate for these good address small homes. If I am right about the interest rate and it remains flat or nearly stable and the growth rate picks up, we could be in for a better year in property.

Whilst this blog is loaded with the future, we at Homeloan Junction are driven to continuously live in the present when it comes to service and value. Our customers deserve nothing less and as much as the future may be somewhat unpredictable, we intend to live up to our reputation as ‘stayers’ who work hard to achieve our goals. The banks have acknowledged our prowess and our success has been recognised a number of times.

May 2017 be Your year. May it be prosperous and worthwhile. May your dreams be worked out with a big dose of optimism and enthusiasm. May your hard work at relationships pay off and set the scene for honest, successful business dealings. Along the way, laugh more; it is truly medicine to the soul. As we would say in Afrikaans, “Ons gun dit aan jou”.

 

Yours in Property