Love affair or investment
When is the ‘right time’ to buy a new home? The merits of investment in real estate have been debated back and forth in the press for generations. Try as we might we cannot find conclusive evidence to support the ‘buy versus rent’ or ‘own home versus buy-to-let’ debate. Everyone has an opinion derived from their relationship with the market. When all is said and done the best motivation for buying a new home is simply that you like it… It’s a love affair that begins the day you walk into the property, and continues until you part with it.
Whether you prefer the ‘safe as houses’ primary residential investment, or the more sensible listed property option, you may have to moderate your return expectations through 2010/11. We’ll take a quick look at recent statistics for commercial property (including industrial, office and retail) before turning to prospects for rentals and capital returns in the residential market.
Property market still hibernating
We borrowed the above phrase from the latest property commentary circulated by property economists Rode & Associates. Their latest report on the state of the property market identifies significant weaknesses across all segments of the commercial property space. Property lags the business cycle by some margin, as evidenced by poor performances in the office segment. Erwin Rode, economist at Rode & Associates says the Durban decentralized area was the only region (with nominal 5% growth) to exceed the growth rate in building-cost inflation, currently 2.6%. “For Cape Town, Johannesburg and Pretoria, growth was, on average, below that of building-cost inflation, and real rentals are currently lower than they were a year ago,” he said.
Things don’t look much better in the industrial property market. Improvements in manufacturing activity and retail sales have thus far been offset by a lacklustre world economy and large numbers of domestic layoffs. “Uncertainty in the industrial property market extends to prospects for market rentals, with these rentals continuing to contract across the country,” notes Rode. The hardest hit areas include central Witwatersrand, Durban, Port Elizabeth and the Cape Peninsula.
Capital values across the sector could decline as a result. “Considering that market rentals of offices, industrials and malls are shrinking in real terms, this situation could eventually lead to investors requiring higher minimum income returns to motivate investments in property,” observes Rode.
Buy-to-let improves, but...
We’ve seen a number of pro buy-to-let articles of late. But the motivation to buy a second home falls flat on three counts. First, you could see a spike in un-let properties on the rental market due to underutilised World Cup stock coming back to market. Second, the short-term capital growth you’re likely to achieve on a ‘second’ home is rather disappointing. And third, difficulties with tenants are well documented. Even if you’re lucky enough to find a suitable tenant, your rental income is gradually eroding. Rode notes that flat rentals in Durban and Cape Town only managed a nominal 1% growth in the first quarter of 2010, while Johannesburg and Pretoria rentals were at the same level of a year ago.
Against this backdrop the nominal improvement in house prices is counterintuitive. “After reaching its lowest point in the first half of 2009, yearly growth has accelerated to almost 14% in April, up from 12% in March, possibly due to easing credit standards,” says Rode. But, he warns, “Once the base effects have played themselves out, one can again expect house prices – especially in the lower-priced segments – to show more moderate growth rates.”
Fees favour long-term investing
Jacques du Toit, senior property analyst at Absa Home Loans holds similar views on residential property. “Based on house price trends in the recent past, nominal year-on-year price growth appears to be near an upper turning point,” he says. He expects year-on-year house price growth to slow in the second half of 2010.
Local consumers remain slaves to debt, with the ratio of household debt to income creeping up to 78.4% in Q1 2010. Consumers are struggling despite their mortgage repayments being 29% lower than the peak level of December 2008. Savings from the 550 basis points reduction in interest rates since have been absorbed by lifestyle expenses and other administered price increases. “Household mortgage debt was at a level of 47.8% of disposable income and 61% of total household debt in Q1 2010,” writes Du Toit. He expects the year-on-year growth in mortgage advances to remain in single digits for the rest of the year. At those levels you shouldn’t expect domestic house prices to shoot the lights out.
Editor’s thoughts: It’s difficult to make money by buying and selling a house. Each time you ‘flip’ a property you incur massive transaction costs, including real estate agent commissions, bank and attorney fees and government transfer duties. Exceptional circumstances aside, you have to hold for the long-term to realise any investment gain. Do you look at your house as an investment, an expense or a necessity? Add your comment below, or send it to gareth@fanews.co.za
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