The South Africa property market has during the last 50 years reacted differently from the boom-bust scenarios experienced elsewhere in the world.
However, it is important to understand that the current market is more ‘normal’ than it has been for a very long time. The artificially created ‘boom’ is now being corrected by natural market forces and will leave the industry in a much more sustainable state than before. The 2010's property plateau will most probably be longer than the 6 year span experienced during the 1990's and its run will be determined by the inflation rate and logically its effect on our currency.
The reality is good news
South Africa is experiencing a property market correction, but it has been not been on the same scale as has been experienced in the USA during the last 3 years. Only a certain sector of the South African property market is experiencing a correction akin to the "American nightmare" of a devaluation of property value up to 50% and it has predominantly been visible on two fronts.
The first area is in the buy-to-let market section and more specifically in areas with an average to low rental demand. This generalised statement needs however to be qualified even further to pinpoint complexes with a below par managing agent and/or a Body Corporate who has allowed a bad rental mix to develop over the last 4 years. Complexes where the house rules do not "control" the quality and the average rental income for the units, have been experiencing sheriff auctions which culminated in a drop of value of between 45% to 60% below present CMA (comparative market analysis) values.
The second area has developed around the affordability of credit / cost of servicing bonds, resulting in a high level of household debt to disposable income (due to high unemployment levels etc.)
This buyer's market environment came about due to new property investors who did not do their homework properly during the "2004/6 boom", creating a distressed sales market scenario with an oversupply of stock which will take some time to clear out. A nominal house price growth closer to the historical 10% per annum average could therefore only become visible again when the oversupply has been dealt with, potentially initiating another so-called 23 year property cycle with a positive capital growth cycle in nominal as well as real terms.
The following correction symptoms are present:
1. High percentage of distress sales. The big percentage of distress sales in the property market has increased in the first quarter of 2011 to 22% of total sales - up from 17% in the last quarter of 2010. A high percentage of sellers are therefore forced to downscale due to financial stress
2. Availability of credit (bonds or mortgages) limited. Housing price deflation is being fuelled by banks that are constantly reassessing their exposure to the home loans market and being cautious in granting new bonds. Banks in South Africa have only during the last few months been starting to relax and were previously as tight as was last experienced in the early 1980s. The effective approval rate has improved from 58,9% in March 2010 to 64,5% in March 2011.
The implementation of the NCA (National Credit Act) has redefined a borrower in South Africa. A large percentage of borrowers have been classified as a credit risk based on e.g. a few missed credit payments. Until the banks will operate on a more discerning basis, evaluating the long term reliability of the applicant, home ownership in the entry level property market will remain a problem. Deposit requirements also remain a stumbling block for especially buyers who wants to buy into the affordable housing markets.
3. High bond or mortgage stress levels. In SA mortgage stress has sharply increased from 75 000 in the third quarter of 2008 to 130 000 in the last quarter of the year. Severe mortgage stress (4 months behind in bond payments) has catapulted from 8 000 in the second quarter of 2008 to over 35 000 in the last quarter of 2008.
4. Low sales volumes . Property transactions are still 40% below the average transaction volumes of the SA property market during the last decade - i.e. about 16 000 transactions per month (or 192 000 p.a.).
Another dampening influence on sale volumes in South Africa has been the relative low levels of buy-to-rent investors - who at the moment comprise only some 7% of the total property buying market, down from about 22% during the property boom period.
5. Below historical levels price growth. Besides "debt", the rest of the market stimuli (death / divorce / downscale / depart) have been strong enough to keep the price growth in South Africa relatively intact. This relatively stable market conditions has re-instilled relative confidence in the South African property market.
6. Uncertainty about market values of SA property. Despite the uncertainty regarding the future of the market, South Africa has potentially amongst the highest percentage of first time buyers (or upgrading buyers) in the world - eager to commit the moment credit will become more readily available.
There is never a better time than now
Property ownership combines two important financial elements - you can borrow money against it and it is a very good hedge against inflation. A big mistake that many make when comparing property to other assets is to compare the nominal growth rate of the property and not take into account the return they actually make on their money.
Real Estate specialists agree that it is the best time to buy property – prices are the lowest in many years, with a wide range of good quality properties on the market and interest rates unlikely to be this favourable again soon. And there are real bargains to be found at the moment.
