HOUSE PRICE REALITIES

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I emailed Vincent the other day to ask for blog titles. Given the news and views in the market at the moment I’m scratching my head for subjects.

I really enjoyed writing the Land series. Its foundation, its worth and why, and the proposals which unfortunately seem to result in an inevitable amendment to Section 25 of our Constitution, were really interesting to uncover. I had no feedback from anyone but I hope you found it an interesting journey.

You read every day about slow-moving house prices but I’ll make a few points from some recent research papers. Before I do that, I’m going to refer to an article [I cannot find it, for the life of me!!] that I read about the Eastern seaboard house prices. Many examples of recent listings or sales were mentioned by a leading estate agency brand where prices have been slashed, but like R27m to R15m and R37m to R25m slashed, with two interesting conclusions. The first was the sensationalism of the price cuts and the second, the bargain-buying opportunity. The first was “sensational” to say the least – a statement of fact with pictures of these beautiful homes at early-2000 prices, and an amazing interpretation of why the prices have been drastically cut, some of it economic and other social reasons but nothing too serious. But then came the “reason to buy” and “this is your last chance at these prices” section which was spin of the highest order. The bottom line is, if you don’t buy now you may never be able to afford that house again. So com’on, buy now folks while they’re dirt cheap! It reminds me of someone prepared to pay R37000 per month for an apartment in the Waterfront that was worth R22m. That’s a 2% annual return for the owner on the face of it. But really, who have R15-R25+ million to spend on a holiday home? What would the “bargain” house really give you on Air BnB? And what about the service and maintenance costs on the edge of the sea? The reason for the collapse [because that’s what those restated prices represent] is cost of maintaining a second property in the prevailing economy and, I’m sure, the property risk of ownership in SA given EWC fears and even the desire to emigrate to get away from it all. And finally, as I read the article, it was blatantly obvious to me that the Rich are getting poorer in Rand terms but they still had assets to be seen to play the high life.

Really a telling story whatever your opinion or station in life.

Back to the realm of the normal……….

Standard Bank’s Property Research on 6 August 2019 is titled, House price growth still constrained, has a few pointers:

 

  • House prices slightly accelerated to 3.9% y/y in July from 3.8% y/y (previously 3.7% y/y) in June. Nevertheless, when adjusted for inflation, house prices moderately declined 0.5% y/y (using July’s inflation forecast) after declining 0.7% y/y in June. Year-to-date, house prices have only increased by 4.1% y/y compared to 5.6% y/y in the corresponding period last year. What I read from this is the good news that house prices are continuing to rise even though the upper-end market is being ravaged by price cuts.

 

  • The national median house price was R1,017,041 in July (from R1,009,641 in June), with the Western Cape median house price 37.4% above the national median house price at R1,394,298. In Gauteng it was 3.8% below the national median; KwaZulu-Natal 4.8% above the national median; and Free State, 27.9% below the national median. Fair to say that the Cape still carries a premium to the rest of the country which it has built up over decades of good management and almost-unique scenery.

 

  • Our view is maintained, real house prices are essentially still moving sideways, and we still see a lack of robust growth in the near-term. At the moment, tracking inflation is as good as it gets but inflation has always represented a bad investment and we all know, above-inflation is required to maintain our status quo. You could certainly have done better in Bonds or Preference Shares over the last 4 years or so.

 

Standard Bank, as usual, makes some very interesting points though:

  • The 0.25% interest reduction may not do anything to house prices but it’s a damn side better than an equal but opposite increase.

 

  • The cut is not sufficient to overcome the undermining of confidence caused by our politics, but it does serve to remind me, as does his re-appointment, that Lesetja Kganyago, the SARB Governor, is a pre-eminent resource in our country.

 

  • This [the above two points] is further reinforced by the rising unemployment rate and the bleak prospects for employment and economic growth. To put it into perspective, when the unemployment rate increased to 29.0% in 2Q19, employment for those between ages 25 – 34 declined by 72 000 y/y, and for those between ages 35 – 44, declined by 59 000 y/y. Arguably, these are the group of people at a crucial stage of their lives who should at least be purchasing their first homes or already paying back mortgages. These statistics struck me as powerful. As much as we talk a better life for all, the “all” that matter most in home ownership are being deprived of this basic investment. This is unfortunately not a zero-sum game – those deprived of buying a home economically demand a home from taxpayers who just can’t cough any more than even that required to keep SOE’s in business. The American Dream taught us that if you want people to own a home, give them quality work and then watch the virtuous spiral that results as the economy literally catches alight with developmental activity.

 

  • Regrettably, this is not a short game. World economic growth prospects remain mired in Trade Wars and Immigration issues which have precipitated the likes of Brexit and its disruption in Europe. Down here, I’m always reminded of the opportunity cost of the inward focus [political warfare and lawfare] of our parliament who are our representatives who serve to drive the nation forward. Leaders, don’t underestimate your cost to this nation and her childrens’ children!

 

  • To this point, Standard Bank has a revised forecast of 0.6% this year.

 

In case you think I’m negative, I’m not. Like the article I alluded to earlier, I could say this is a good time to buy buy-to-let flats from mortgage-distressed sellers but I’ll spare you the “charm”. But this much I will say, given that we have the dire economic issues we have, given that our currency is one of the most open and therefore most traded currencies in the world, and given that Moody’s have issued warnings to us, we have done a lot in this year of which we can be proud. Regrettably, those initiatives are backward-facing and building from a “hollowed-out” basin of human capital with integrity, but they have been brave and courageous initiatives by gutsy men and women.

 

“Never give up! Never give up! I say, Never give up!” said Winston Churchill to schoolchildren in his finest hours.

 

Yours in Property.

Land [Part 4]

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We have journeyed through the Land issue of our country.

No matter how well-informed, no one knows who was where when [Part 1].

The issue may boil down to the Cultural value of land, the Commercial value of land and the Capital value of land. These three characteristics were covered in Parts 2&3.

My opinion is not the “law” so please forgive me if you have a different version. In fact, let me know if you disagree and we can chat. As usual, I would love to learn.

But something has just arrived and it bears mention. It is the latest version of EWC land and it looks far less inflammatory than what we have feared. Let’s have a look at the article……..

BusinessTech 29 July 2019, reported:

“The presidential advisory committee has published its report on land expropriation without compensation.

The report makes a number of recommendations on land in South Africa –  including provision for the establishment of an integrated planning system’ which will be responsible for the planning and coordination of the land expropriation process.

The report also calls for the speedy distribution of land that is already owned by the government, as well as ‘voluntary donations’ from various sources such as churches, mining houses, and commercial farmers.

In line with the current Expropriation Bill that is being considered by parliament, the report suggests that the conditions for land expropriation without compensation, should include:

  • Where land is occupied or used by a labour tenant;
  • Where land is held for speculative purposes;
  • Where land is state-owned or owned by a state-owned entity;
  • Where the owner has abandoned the land; and
  • Where the market value of the land is equivalent to or less than the present value of direct state investment or subsidy in the acquisition and beneficial capital improvement of the land.

Over and above these conditions, the report suggests that expropriation without compensation also applies in the following circumstances.

  • Hopelessly indebted land;
  • Land obtained through criminal activity;
  • Informal settlement areas;
  • Inner-city buildings with absentee landlords;
  • Land donations (as a form of EWC); and
  • Farm equity schemes.

What happens next?

Last week, the National Assembly has agreed to establish a multiparty committee to introduce legislation amending section 25 of the constitution.

This committee will draw on the findings of this report as well as previous studies, and past legislation to come up with a new bill which covers the above issues.

The new committee will report back to the National Assembly by 31 March 2020, and will and be composed of 11 voting members and 14 non-voting members.

Voting members will be drawn from the African National Congress (6), the Democratic Alliance (2), the Economic Freedom Fighters (1) and other parties (2).

The 14 non-voting members of the National Assembly, will comprise of the African National Congress (2), Democratic Alliance (1), Economic Freedom Fighters (1) and other parties (10).

Once the bill has been finalised it will be gazetted and undergo a full public consultation process.

This means that the earliest that land expropriation can be introduced is mid-2020. However, it will likely take much longer as the bill will face intense scrutiny from the opposition parties and members of the public.”

A couple of points that will also conclude this resume of Land, that it exists, how it is transformed culturally or commercially to have “meaning” and that it is the source of the most vicious tension at this point in time in South Africa. The land redistribution issue sorted, we would be able to stop focussing on it as a distraction and we could focus on the real issue, its productive use for food, industry and habitat. If not sorted, some of us fear it will disintegrate into civil war and scorched earth to the detriment of All. But my fear is that it gives rise to the biggest impediment to future growth and prosperity; the reason for every failure and the balm that we use to soothe our consciences when we continue failing to deliver to our people. To this point, I understand, I really do and accept, that apartheid was a social, inhumane disaster but it is no longer the reason for every cock-up in this country starting with the school book fiasco of a few years ago where our erstwhile president blamed apartheid, to the disgusting rape of VBS bank by greedy, self-seeking individuals that got onto a “scheme” of mega-returns. You should all be bloody ashamed of yourselves and jailed immediately! Like the game of Monopoly, Go to Jail Do Not Pass Go.

That stuff off my mind, a few points:

  • The Land proposals above don’t seem inflammatory by any means. I guess there may be some who have farm in old trusts and therefore will be aggrieved by losing them but, to the point, land must be productive or really, it has little value beyond its cultural value.
  • The use of State land is significant. Unfortunately, it may include Green Belts, like Emmarentia Lake, in its ambit. So, just by the way, you can buy plots in England through St James Capital Group that are farms at this stage that need to be converted into development land. The fight in Britain to preserve green belts is huge and can delay rezoning by a decade. In other words, we’re not the only country in the world with a housing backlog and protestations against affordable housing; the UK is 3 million houses short and fighting to deliver.
  • Allied to this is the issue of affordable housing where “I” live. It will destroy the value of my property, you know? Sadly, collateral damage is unavoidable if we are to readdress the disadvantages of the past and you or I may be caught in the cross-fire.
  • That said, one of the concerns is that land invasion will be enflamed by reckless demagogues who drive “their people” to invade land. The only solution to this is the voice of reason, followed by the rule of Law, followed by forced eviction. We have watched this movie in Hermanus. It is ugly and municipalities have inadequate resources to begin the negotiation process and then no power to enforce the law and then poor Police resources as a last resort. It is ugly and may be coming to your town soon; don’t be naïve. However, once all attempts failed and Dubai [a pristine, 10th biggest Milkwood forest in the world now burnt, on the beach and actually owned by a private company who failed to evict; as well as the site for the future municipal desalination plant] was occupied by 300+ shacks, it has been reported that a proper multi-use development will be built in due course – so hope remains!

The problem will fester on unless we solve it. Solving it will be tough and well-nigh impossible in some cases. It will call for cool heads and warm hearts. Money will need to be found so as to follow through on well-intended land redistribution. Our negativity will need to be tempered by practical realization but if we don’t commence the process it will be a sore point from generation to generation. I think it’s reached the point where politicians are so hell-bent on winning votes that even if they got huge swathes of land, their “people” would reject their plots and swop them for a stable, proper job in the city with a pension and medical aid. As always, time will tell.

But what is reassuring about the list above is that honest, hard-working, bond-paying home owners will still have their properties. They will go to work every day, their kids will grow tall and educate, and their capital value will be realised by maintaining their property and selling it in a process which is world class. You and I fit into this mould and we, in the property industry, ensure the dream every day for every kind of person and family. Don’t allow the “noise” to cripple your motivation to get up in the morning and “house the nation”. Right here in Hermanus, Greeff Properties is opening for the first time; goodie for them as they recognise that “this too will pass”.

Homeloan Junction is in this with you. Fully invested but not naive, committed responsibly and solely to the good of the industry and to thriving for many years to come.

Speak to us and let us surprise you with what we can deliver to your business.

Yours in Property.

LAND [Part 3]

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We discussed Culture and Commerciality as part of the value of land in Part 2 of our blog on Land.

We begin with Capital in this feature.

CAPITAL: Us laymen understand this best. But in order to gain a full perspective, we will incorporate the other two.

I was once corrected when I told a group that their home is their biggest asset. “No’, said one participant, explaining that their pension was bigger. So, the moral of the story, don’t job-hop! Our houses are big investments and I know of no one who has decided never to buy. Our objective is to buy a home as soon as possible, pay off the bond and then enjoy the proceeds from its sale one day to supplement our retirement funds. In between, we may change homes in life-stages moving up the ladder of size and in the end, downscaling for reality. The theory is that our homes will appreciate in value and that that accretion of capital will complement our savings in other vehicles both onshore and offshore. But there are some other considerations that come into play so let’s explore them.

Robert Kyosaki of Rich Dad Poor Dad fame, taught me a thing or two when he postulated, against all the current wisdom, that a house is a liability and not an asset. In fact, he made the point repeatedly (even annoying NYSE and the influential National Association of Realtors) that any asset which does not yield an income, is naturally a liability. I have alluded to him so often over my years of writing blogs as his wisdom is so unconventional but completely unassailable. This is especially the case when property is not selling almost at any price – I have two friends who right now are experiencing this. It feels like, “There are just no buyers” said one of them recently. Kyosaki’s view was simple, if you wanted to own a Porsche, take the cashflow you would spend and buy a factory. Then as the factory’s tenant paid off the bond, use the net proceeds to buy the Porsche. Thus, for a little deferred satisfaction, you had the factory and the Porsche, and you would not feel the liability that we all know a Porsche is. Being Head of Homeloans and a proud homeowner, this was unbelievable news to me. But even sitting here looking onto my garden, it’s quite obvious that this home could make a lot of money on AirBnB that we don’t have by living in it, and re-painting it last year was costly not income-generating. Point is, we don’t think like this [or even agree with Kyosaki] when our homes are growing at 8+% compounded every year. It’s only when that rate of growth collapses and even selling your house, [pointing to property’s illiquid nature; never mind having to perhaps pay a bond], becomes very remote, that we have this discussion. The Western Cape has felt the cold wind that has chilled the Gauteng property market for years. To sum it up, if your house is growing at 8+% in value every year it more than mitigates the cost of maintenance and that makes it an investment amongst other investments. Capital is often locked up in an asset.

Another point is land ownership. Your home is built on land and how that land is owned or regulated is important to it and your houses’ capital value. The 99-year Lease has always been the nemesis of the banks, but 99 years is a seriously long time. A bond of thirty years would fit into it 3 times and only with the last would the bondholder need to worry about value in terms of continuity of tenure. Take the famous example of the Duke of Westminster who owns 300 acres of London being Mayfair and Belgravia. It’s worth UKP10bn and is leased long-term to everyone who lives or trades in the area. I know when I got back from Mauritius last year that I mentioned their 60-year lease form of land ownership nationally. Ownership methods in South Africa fall into a number of categories and let’s look into them for the sake of understanding Capital value.

Freehold: This form of ownership is common, and the title of ownership is registered in the Deeds Office. It gives you unfettered ability to do whatever you like with your property so long as you pay for services and remain within municipal bylaws. Your house is your castle and you can add on, paint and sell at a reasonable whim. All of the capital loss and appreciation accrues to the owner; but the point for our conversation is that the capital does that because you own the land.

Rental: In this case someone else owns the property and title never transfers. But for certain exceptions contained in the written and signed [now a law that it exists ie verbal lease agreements are not permitted] Lease agreement, maintenance, services [normally excluding electricity and water] and any depreciation or accretion of value are the responsibility and right of the owner. In short, the tenant never has any capital opportunity but also seldom takes any significant maintenance responsibility. In fact, in most leases, the tenant must return the property to the landlord in the same condition they initially received it, wear and tear aside.

Cluster: This is a form of ownership akin to freehold but where a form of community living is intended. The primary purpose is shared security, but the style also became popular when cities began to encourage densification so as to alleviate urban sprawl. In this case a small communal area levy is paid normally to an innocuous Home Ownership Association [HOA] for caretaking of the common areas such as parks, pavements, internal roads and water features. But you are constrained by the Estate Guidelines if you want to alter your dwelling, sometimes even to the colour of the paint. It can be annoying but normally neighbours become friends, and everything can be handled as amicably as possible. As regards capital upon sale, it belongs to the seller but be careful of “estate levies”. Ours is 0.25% and clearly agreed and signed at exception, however, I have family who were stung 12% upon sale and shocked at the loss they suffered!

Sectional Title: Marina Constas of BBM Attorneys wrote a book almost 20 years ago titled, Demystifying Sectional Title, which is a good read if you’re interested. To sum up this form of ownership, she writes, “Complex living is…..complex.” This form of ownership extends to cluster-type developments, semi-detached and high-rise buildings. The example right at the beginning of this blog series, the owner of a unit on floor 17 of the Michaelangelo Towers, is typical of sectional title. Great for security, a lower cost of building [though you seldom feel that!], and capital accretion. The Body Corporate [BC] is accountable for property maintenance and disasters and must insure for these and is also accountable for the integrity of the common areas ie as regards maintenance and normal use. The biggest problem comes in when self-destruction is caused to the property or when the BC funds deplete. Banks will not lend into a defunct BC balance sheet and nor should you consider buying into such a complex; it’s bad news and an individual owner has little influence in the Scheme. But all things going well, sectional title has served property ownership well so far in our country. Capital belongs to the owner.

Leasehold: I think we have covered this style of ownership implicitly above. However, I was surprised to learn that Waterfall Estate in Midrand is a leasehold property. I don’t have the detail, if I’m correct, but it would be honestly disclosed, I’m sure. Capital is the owners but beware being the last owner before the long-term lease ends. Logic says the Lessor will simply extend the lease as happens in the Duke’s case but practice could be different.

Fractions: This form of ownership, quite distinct from timeshare, is excellent if properly managed and let [in a rental pool] and can give the fraction owner a good return on investment in a sough-after complex. Its downside lies in the unavailability of funding due its “shareblock” characteristics so only cash buyers can participate. In my experience, very little capital accretion occurs, and the ownership style is recommended only amongst “friends” and for vacational properties. Certain of the Sandton apartment complexes allow for units purchased to be aggregated in a rental pool in the context of a hotel and conference center. Capital in the Park in Sandton is such a successful development, but such schemes are not fractions but rather a play on sectional title with a formal rental pool.

No one blinks an eyelid with any of these examples for one reason and one reason only: Consistency of Policy. It is the inconsistency of policy, the willingness to amend Section 25 of the Constitution, which now seems a certainty, that has spooked the property market in South Africa. “Spooked” is a euphemism for the anger, fear and frustration that land ownership may no longer be sacrosanct in law and that expropriation with compensation may no longer be engraved in every property transaction since the beginning of property title. No power line, railway or road has been built that has not implied expropriation in their path. I give you some land and I am compensated using a Sworn Appraiser’s valuation. The problem now is dispossession and the critical need to re-address the past as it is understood by the majority of our citizens. There lies the aggravating rub and I must say, the only government I would trust with the process if it has to go ahead, is one headed by Cyril Ramaphosa. I would rather the land redistribution legislation do its proper work but if something more radical [which I do not believe] is required, he should head it. What the future holds is precarious our beautiful, tortured country is suffering from deep uncertainty.

Also, for me at the heart of this issue where we have explored the wealth creating potential of land ownership, is the fact that land redistribution has not worked, that many units in the likes of Soweto are still not owned, and that tribal lands remain under the rental control of chiefs. Bottom line, no capital has been built in these three areas and only Culture is served by tribal lands. The downright hypocrisy of these issues against the willingness to “bet the bank” with expropriation without compensation [EWC], is anathema to me. Get land redistribution working with proven models in place that can be scaled then we can stomach EWC as a nation. Get the title deeds of so-called “matchbox” houses delivered then we can stomach EWC as a nation. Get some form of land value and “sectional title” into tribal lands so tenants have wealth creating and not just subsistence benefits from their use of their land and then we can stomach EWC as a nation. And a final bet I would wager is that those initiatives would solve so many problems that we would never need to radicalise uncompensated land expropriation.

Long may the property industry last!

Yours in Property.