The Future of the Property Market

Questions directed at property professionals, developers, mortgage brokers or conveyancers regarding the past two years in real estate, often elicits a visceral response. Regardless of their word choice, they are unanimous, like a church choir:

“We are glad it’s over!” Granted, they have reason.  Both 2008 and 2009 were largely unkind to those who are dependent on income from the real-estate industry.

But American author, Dr Wayne Dyer, wrote: The past is over and gone. The future is not guaranteed.  So what does a brief synopsis of the past tell us of the ‘unguaranteed’ future of the property market in South Africa?

THE PAST:

The past 24 months have painted a bleak picture.  Statistics from SAPTG indicate that property priced between R300,000 to R5,000,000 reported an overall decline of 34% of full-title transfers between 2008 and 2009 and an even worse 39% decline in the number of sectional title transfers.

 

The total transactional Rand value declined by 30% and 37% in full-title and sectional title sales, respectively. This meant that total property purchases in this price-band came in at less than R100 billion for each of the past 2 years.  A paltry sum compared to the R700 billion spent annually on property before the real-estate recession began. Just consider what an enormous effect the resulting reduction in taxes had on the fiscus!

 

Some silver lining was shaped by a nominal annual increase in median property prices. The full-title median increased by 7% to R750,000 and the sectional title median by 3% to R616,000 during the same period.

 

The number of cash sales surged from a high of 28% in 2008 to over 38% in 2009. From this one may conclude that there are suddenly more cash buyers now than ever before. That is not necessarily the case. True, some have chosen to liquidate other asset classes and increase their property portfolio given the poor performance of the stock market during 2008/2009. Nevertheless, cash buyers as a group have always been strong swimmers in the property buying pool.

 

With the overall decline in the total number of buyers, with the pool drying up, cash buyers as a group are consuming a large portion of what is available.

 

Many have pounced on bargains at auctions or though investment clubs. For instance, in 2009 over 40% of all sectional-title sales, a favourite of buy-to-let investors, were cash deals.

THE FUTURE:

 

While SAPTG’s latest figures show a return to meaningful house price inflation in real terms, a lot remains to be done. The buying pool is little more than a puddle. In 2007 over 500,000 transfers were registered at the 10 Deeds Offices around the country. In 2009 the number dwindled to less than 150,000. The forecast is less than 130,000 for 2010.

 

Property developers have been particularly hard hit and not surprisingly, their appetite for new projects has diminished. From a peak of 103,925 plans passed during 2006 on the back of a relaxed lending environment and a buoyant sellers market, numbers plummeted to just 54,337 plans passed in 2009. This year holds little promise for this sector with a forecast projection of just 26,000 plans in 2010.  With a country that appears to have weathered the recessionary storm better than most and with politicians exuberantly optimistic upon seeing first quarter GDP growth of 3,2%, why are developers not building furiously? Primarily two reasons: The aforementioned small puddle of able buyers and a considerable rise in building costs. In addition, with the NCA putting brakes on reckless lending and banks assigning a higher risk profile to building loans most buyers realize that better value is afforded by purchasing a completed dwelling. Building on vacant land will cost, on average, 18,3% more. High stock levels at estate agencies in the average house price range - R1,000,000 -  means that buyers are spoiled for choice both in urban centres and at the coast.

 

Increased affordability due to an accommodative monetary policy and some discretionary increase in income levels has supported an upward trend in demand. However, the macro-economic ‘recovery’ is largely supply driven and demand needs to stabilize. With further interest rate cuts unlikely we will have to proceed with patient optimism, prudent risk assessment and, when all else fails, hold thumbs!