Property dreams lie in tatters – for now
Everything moves in cycles. The economy experiences periods of growth and stagnation. Inflation and interest rates ebb and flow over time, declining for a number of periods – consolidating – and then climbing again... And equity markets go through major boom and bust cycles too. These cycles have a tremendous impact on investors. Short-term traders like to “guess” the cycle turning points to maximise their profits – while long-term savers fear having to “cash out” their investments near the low point of a declining cycle. The devastating effect of a falling market on pension payouts was clearly illustrated at the height of the 2008/9 market collapse.
There’s another price cycle threatening South African savers, namely residential real estate. The thousands of people who rely on their primary residence to supplement their retirement plan could be in for a big shock. Their idea – to purchase a house, pay it off and then extract additional “cash” when downsizing the property – is under.
The “big house is worth less” syndrome
The first problem these homeowners face in retirement is the shift in real estate consumption patterns. New buyers are giving up the comfort of a large house in the suburbs for more compact and secure residences in security estates and townhouse complexes. As a result pensioners hoping to “swap” their large homes for a smaller place and a large cash bonus are increasingly hard pressed just to replace their homes. I’ve been in the market for a new home for some time now, and have met many “older” sellers who are quite taken aback by the price they’re likely to achieve for their homes.
Here’s an example to illustrate. Joe and Jane Average bought their home in a leafy suburb in Centurion back in 1986. They’ve paid the house off some time ago – and have been living in the residence through the first fifteen years of retirement. They’re ready to “swap” the family mansion for a smaller place! Problem is they can only get R1.4 million for their 350m² house/2 000m² plot combo, and the asking price for 170m² townhouse properties in the area are already closing in on R1.250 million! By the time moving expenses are factored in the R150 000 “windfall” is eroded even further and the “cash” which the couple hoped would boost their retirement pot is virtually wiped out. The situation worsens if the couple hopes to make a second move to a retirement village.
Economists forecast a long sideways wallow...
The second problem is house price cycles tend to be much longer than stock market cycles. House price growth has actually been in decline since the market peaked in November 2003. The First National Bank house price index points to further downside after a brief (but rather soft) recovery through 2010. Property economists now say 2011 will be a tough year for homeowners, pencilling in a 2.5% decline. And Cape Town-based property specialist Erwin Rode reckons house price growth will remain flat or negative until 2015! He told Finweek: “Owning the house you live in isn’t going to make you rich.” The risk to using your house as a “retirement” tool is being forced to sell during one of these lengthy property downturns...
A declining property market introduces another challenge to the “house as pension booster” debate. When prices are falling it becomes increasingly difficult to actually sell your property. It’s not like a fixed deposit or stock market investment which you can easily convert into cash. John Loos, property strategist at First National Bank says it now takes more than 15 weeks to sell a house (eight weeks during boom times) AND sellers are typically having to drop their asking price to secure a sale.
The Finweek story House Trap – Why Buying a House has Lost its Lustre is certainly worth a read... They point to a South Africa where thousands of homeowners actually owe more on their properties than the house is worth. This situation – known as negative equity – is what brought the US housing market to its knees. Worried yet? Another problem is the sheer number of homeowners who are struggling to repay their mortgages despite interest rates at record lows. At 30 June 2010 the National Credit Regulator said approximately 117 000 mortgages were in arrears three months or more! Sales in execution remain high, at around 2000 sales per month versus the 2600/month high witnessed in Q4 2009.
Cash is trash; but so is vacant land!
The outlook is even worse for vacant land. Holders of speculative property in golf estates and similar “high density” developments have found – to their horror – they cannot sell these properties at any price. In the same Finweek (11 November 2010), Vic de Klerk laments: Bare land is worth nothing... “Why pay for a plot when you can get the building next year with the plot thrown in for free?” he asks.
I’m not arguing against purchasing your home as a long-term investment. It introduces a certain financial discipline which cannot be discounted. What I’m warning against is putting too much faith in your primary asset (your house) to fund additional requirements through retirement.
Editor’s thoughts: It’s easy to oversimplify when talking about property. There are so many factors which can influence the “average” the analysts typically focus on. We’re certain there are plenty of niches where houses have fulfilled their retirement function more than adequately. But there are those that haven’t! We’d love to hear from you if you’ve tried to downsize your property recently. Add your comment below, or send it to [email protected]
