House price growth slows radically

The median house price declined relatively sharply to 5,7% year-on-year in August from 10,4% in July, according to Standard Bank’s Residential Property Gauge for August.The higher end of the market experienced a tightening of financial conditions which affected the activity in that segment adversely.

The financial landscape of households also changed with the hike in the repo rate in August. Mortgage repayments have increased by 30% since June 2006.

“Economic growth has slowed down to 4,5% in the second quarter of the year, but the macroeconomic environment remains relatively resilient,” says Johan Botha, Standard Bank senior economist.

“This implies that house price increases are likely to remain in positive territory, but in single digits over the medium term. A further tightening of monetary policy at the next Monetary Policy Committee meeting in October, which is seen by many as a strong possibility, will change the financial environment and thus the outlook for the housing market adversely.”

The financial landscape of households and thus the property market has changed in the last month and has become gloomier. The August hike in the repo rate brought the increase in this benchmark rate to a full three percentage points higher than the rate in June last year.

The increase in the repo rate signalled an increase in mortgage rates, with mortgage repayments jumping by approximately 30% over the same period.

Higher interest rates will affect all households and thus the demand for housing. The debt levels of higher income groups may make them more vulnerable to interest rate increases.

This interest rate sensitivity, coupled with speculative activity taking place in higher-priced property, may partially explain the decline in the proportion of higher priced houses on Standard Bank’s mortgage book in August.

“In August the proportion of the lower and middle price segment increased by another percentage point while the proportion of higher priced houses declined by two percentage points. The greater prominence of lower priced houses on Standard Bank’s book in July and August not only resulted in a lower median (and average) price, but may also indicate that the upper end of the housing market is taking some strain.

“It certainly appears to be a buyers’ market in that segment of the market. With a shift in the distribution of mortgages granted, a decline in the month-on-month median price level in August came as no surprise.”

Research conducted by Credit Suisse Standard Securities confirms that the debt-servicing burden as a percentage of disposable income increases with higher levels of disposable income. The decline in the proportion of higher-priced property may also be partly explained by the artificial lift provided before the National Credit Act (NCA).

The broader macroeconomic environment is still relatively benign. House price data are still reflecting some underlying consumer resilience that stems from the continued expansion in employment and income on the back of a relatively strong macroeconomic setting.

In the first quarter of the year, 17,000 jobs were created, which compares favourably with the 10,000 and 152,000 jobs lost in the first quarters of 2006 and 2005 respectively. The growth in households’ real disposable income of 7,5% in the first quarter (on a seasonally adjusted and annualised basis) was the highest in eight years.

“The tougher financial environment and affordability concerns will affect property prices over the medium term. Only with the expected easing in monetary policy in 2008 could we see the start of another upward phase in property prices,” says Botha.

 Article from Property24 

What drives SA’s luxury market?

In the wake of South Africa’s changing economic landscape, subsequent changes in the luxury property market are inevitable.What factors drive South Africa’s luxury property market? With the spotlight currently on the lower end of the market, what is this sector’s current status and what are its future prospects? Property24 takes a look.

Luxury market driving factors
Property prices in the luxury housing market have reportedly been stabilising in recent years on the back of surging supply and cooling demand.

ABSA’s latest Property Trends Report reveals however that the average price of houses in this segment of the property market has in fact been rising. An improved economy has had an influence on this growth as it has led to increased real disposable income in many South African households.

ABSA reports real disposable income growth to have been 4,7% per annum since 2000 and 6,6% in 2006. Higher disposable incomes have also bolstered the buying power of high income earners and FNB property strategist John Loos explains that “5% economic growth is driving strong growth in higher income purchasing power”.

Other typically South African factors steering the luxury housing market in recent years include employment equity policies, political developments and legislation changes. Although Loos plays down employment equity policies as being specific drivers of luxury property activity, he comments that growing spending power “comes as a result of a dramatic increase in economic freedom, for previously disadvantaged groups as a result of the end of oppressive laws, and for everyone as a result of the end of international isolation”.

What have these developments meant for South African luxury property in the past and what is the status of this sector of the market now?

In the early years of the property boom, higher demand as a result of more purchasing power and favourable interest rates meant that price growth in the luxury market was ahead of the other segments of the property market. A strong supply of luxury homes was thus seen in those years and due to the above conditions affordability was not an impediment.

“More people with high levels of purchasing power mean higher demand. The fall of interest rates post-1998, and then further post-2002, meant a dramatic improvement in the affordability of the luxury end, and a massive surge in demand. Therefore, in the early years of the property boom we saw price inflation in the luxury end outperforming the rest,” Loos says.

The luxury market has not been immune to the effects of plummeting affordability levels and Loos says that “more recently, as affordability deteriorated, the strength has turned to the lower end, with the luxury price bands showing weaker price inflation”.

According to the ABSA report “the gross monthly household income required to qualify for a 100% mortgage on a luxury house of R3,92m for which the monthly repayment does not exceed 30% of income, was about R148,300 in the first quarter of 2007″.

When the average price of an upmarket home was around R2,95m in the first quarter of 2004, the gross monthly income requirement was a significantly lower R105,101.

Doom or boom?
Increases in qualifying incomes and mortgage repayments don’t pose a huge threat to buyers in the luxury housing sector though as many of them are able to purchase property in cash.

Conrad Steinhobel of Lew Geffen Sotheby’s International Realty Hout Bay says “the issue of financing is split down the middle with about half of buyers paying cash while the other half use mortgages or bonds”.

ABSA’s report reveals that “many affluent households might in the past have been able to negotiate a homeloan at a lower interest rate than the variable mortgage rate used in the abovementioned calculations. In reality, this will cause the mortgage repayment and qualifying income in respect of luxury housing to be markedly lower”.

“Besides, at that income level – and especially when the buyer can afford to pay cash for his purchase – the rising interest rate makes a negligible difference,” says Richard Gahagan, managing director of Property24.

The recently introduced National Credit Act (NCA) is not expected to have a crucial impact on the luxury property market either.

“I don’t see the National Credit Act as having a noticeable impact on a market that is currently in a cyclical slowdown in any case,” Loos says.

Steinhobel says the NCA will most probably not affect the higher income bracket as much as the lower income buyer. “Unless buyers have overextended themselves it should have little to no effect.”

Earlier this year housing data released by ABSA showed that the upper end of the market was bucking the price slowdown trend. This report indicated that “growth in the luxury end of the market has accelerated”.

According to Absa’s index the upper end of the market priced between R2,7m and R9,9m rose by 10,9% last year, up from 8,1% in 2005.

More recent data released towards the end of May also points out that “the average price of houses in the luxury segment of the residential property market in South Africa has increased by 113% in total from R1,84m in the first quarter of 2000″. This means the average price of a luxury home sits at a cool R3,92m in the first quarter of 2007.

About the Hout Bay market, a popular destination for high flyers, Steinhobel says “the current supply/demand ratio in Hout Bay has changed quite dramatically in the last six months, with demand now being greater than supply, mainly caused by the fact that prices are more stabile and buyers perceive Hout Bay as an area that offers good value for money”.

He describes buyers showing interest in Hout Bay’s upmarket property as “over 40, married and earning over R50k (per month)”.

Steinhobel’s office currently has a property in Llandudno with an asking price of R48m on its books. This dramatic property offers several reception rooms/entertainment areas, 10 double suites with full bathrooms, kitchens and TV’s and a rim flow pool among other features.

Jana Vorster of Engel&Volkers reports that in the last six months she has been experiencing higher demand in the R5m to R15m region in upmarket Waterkloof in Pretoria.

Although she sees a lot of cash buyers too, she also says that buyers going the mortgage route are increasingly hesitant and are taking much longer to reach a decision, and adding to this delay is the fact that there “is so much stock, with more than 100 (upper income) properties on the market”.

She currently has a 1,100sq m Waterkloof home on the market for R16m with four bedrooms en-suite, several living areas and a flatlet, all on a stand of 2,552sq m.

Other sought-after areas in the country include Sandhurst in the north of Johannesburg where land values, which are around R3k per square meter, are pushing prices ever higher.

Wendy Machanik Properties has a Sandhurst property with a price tag in the late R30m region on its books. This triple volume palatial home, set on an approximately 4,200sq m exotic garden with an abundance of water features, is complete with gazebo, double volume undercover patio and pool.

This mansion with crema marfil marble finishes, boasts two lounges, one with a French polished mahogany bar, formal dining room, family room flanked by the gourmet kitchen, private study with its own entrance plus wine cellar/wine tasting room. It has five bedrooms and large upstairs patio.

More big ticket buyers are choosing Bakoven in the Western Cape over areas like Clifton. Deeds office records reveal that 69 sales worth R286,268m were recorded in Bakoven in 2006.

Meanwhile, in the same period, Johannesburg’s very upmarket Westcliff saw 19 sales worth R164,310m ranging from R1,150m to R18m.

Future prospects
Projecting the performance of the luxury property market Loos says: “Going forward, I believe that for the next few years the lower end will be where the best performance will be, especially for as long as interest rates remain on their current rising trend.

“However, later in the decade towards 2010, one may see the upper end regaining the number one spot in terms of returns due to my expectation that the focus of development will turn more towards the lower end, creating a supply constraint on the higher end as demand grows over time.

“Furthermore, urban land price inflation looks set to be significant as well-situated land with good infrastructure becomes relatively scarcer over time. This would imply strong price growth for prime locations, such as Bryanston for instance, with many of the properties having large stands and being close to the prime Sandton business node,” he says. - Ntokozo Maseko 

Article from Property24 

South Africa: Credit Act, Rate Hikes Cut Growth in House Prices

MEDIAN house price growth plunged to 5,7% year on year last month from 10,4% in July as the National Credit Act took hold, according to the Standard Bank Residential Property Gauge.

Standard Bank senior economist Johan Botha said yesterday the act, implemented on June 1, was affecting growth in house prices by slowing down bond applications.

The act requires banks to check the overall credit exposure of borrowers before approving any new loan.

Botha said many financial institutions had an increase in bond applications in May, before the act came into force .

Applications for bonds had now dropped off.The South African residential property market has been slowing down in any event since its peak near the end of 2004.

House price growth peaked at more than 35% at the height of the residential property boom in late 2004.

Since then the trend has steadily declined, as the relatively expensive property market caused demand to drop off.Botha said the bank expected median house price growth of between 5% and 10% for this year. He expected even more of a decline from these percentages in the first quarter of next year.

The bank said the higher end of the residential property market had experienced a tightening of financial conditions, adversely affecting activity.

Standard Bank said the “financial landscape of households” had also changed with the hike in interest rates last month.“

Mortgage repayments have increased by 30% since June 2006,” said the bank.

Botha said economic growth had slowed to 4,5% in the second quarter of this year, but that the macroeconomic environment remained “relatively resilient”.

“This implies that house price increases are likely to remain in positive territory, but in single digits over the medium term.”

Botha said a further tightening of monetary policy by the Reserve Bank next month could “change the financial environment and thus the outlook for the house market adversely”.

Property economist Francois Viruly, of Viruly Consulting, said the market was seeing property investors “shifting slightly downwards” in the type of properties they could afford.“

This can only be normal considering the hike in interest rates, the National Credit Act and the pressure on the inflation rate.”

He concluded that “although the middle (housing) market might find it somewhat more difficult at present, the lower end of the market should continue to show very significant growth”. 

Article from Business Day 

‘Race and sex’ shock for property owners

A GOVERNMENT-commissioned report on foreign land ownership yesterday proposed the compulsory disclosure of the race, gender and nationality of all buyers along the lines of the Financial Intelligence Centre Act.

The long-awaited report on foreign land ownership said disclosure should apply to all past, present and future registrations of property titles, and that this should apply to all title holders, foreign as well as South African.

The report said the object of the regulation would be for “disclosure and statistical purposes and not for effecting any unfair discrimination”.

Opposition parties have rejected the panel’s findings as overregulation and racist.The report, which has been presented to Agriculture and Land Affairs Minister Lulu Xingwana, has not yet been released for public comment, though land affairs officials expected this to happen soon. It follows a two-year investigation of public policy regarding foreign land ownership and was done by a panel of academics, members of the judiciary and public policy makers, chaired by constitutional law expert Prof Shadrack Gutto. The panel further recommended a limited, two-year moratorium on the sale of state land to foreigners as well as to South African citizens who do not qualify for redress under the government’s land reform policies.

It also recommended that measures be taken against “fronting”.The report said that the moratorium was not meant to be a blanket prohibition, but that it was intended to prevent the disposal of state land, including municipal land, that might be used for land reform and human settlements for dispossessed and marginalised people. The panel’s legal counsel advised it that the temporary moratorium would not be unconstitutional provided it did not lead to arbitrary deprivation of property and that it was imposed through a general law of application.

Because of the limitations imposed on foreign land ownership, the panel recommended a refinement of what constituted a foreign owner. For corporations, it proposed lowering the 50%-plus-1% shareholding. It recommended a similar definition for trusts and partnerships.

It recommended, however, that in light of the long-term objectives of the Southern African Development Community (SADC), citizens from the region should either be exempted or be given preferential treatment. Democratic Alliance land affairs spokesman Maans Nel said the recommended regulations were laughable and blatantly racist. It was incomprehensible why the race of a foreigner would be significant in the ownership of land in SA other than for a racist purpose. The idea that such regulation would not affect foreign investment was “absolute nonsense”.

Pieter Groenewald, of the Freedom Front Plus , said regulating foreign land ownership would be acceptable, but making race an issue was unacceptable . 

Article from Business Day