How Affordable is our Housing? (The Bugle)

The Reserve Bank’s Monetary Policy Committee, which meets every two months to review interest rates and make adjustments deemed appropriate to primarily control inflation, while balancing the need for employment and growth, decided at their most recent meeting on 20^th March 2013 to leave interest rates unchanged. This is good news for the property market and for most other credit sensitive industries, as the expectation for increases in interest rates had become more pronounced as our consumer price inflation rate was being edged upwards. This was recorded at 5,9% in February 2013 which is now testing the Reserve Bank’s upper target limit of 6%. The general consensus now is that interest rates will continue to move sideways for the rest of this year. 

How does this impact on the affordability of housing and has housing become more or less affordable over the past five years? The two traditional measures of housing affordability are the “Average House Price/Average Labour Remuneration”  ratio and the “Installment Value on the Average Priced House/Average Labour Remuneration” ratio. The installment value decreases as interest rates decrease. This measure of affordability is therefore directly affected by interest rate movements. As house prices fall and general remuneration increases, buying a house becomes more affordable. This is exactly what has happened. We have witnessed a huge decline (or improvement) in affordability as measured by the installment index from a peak of 160.90 in 2007 to 76.86 by the 3^rd quarter of 2012. This represents a 52.2% decline or improvement in the affordability of housing in general in the country over this period. 

It is therefore not surprising that we have recorded a noticeable increase in demand for residential property over the first quarter period of 2013. There is a seasonal component involved in this uptick in demand, with the month of February typically being a record sales month for most larger estate agencies across the country. Interest rates however have been low for a while. Prime decreased to 9% on 18^th November 2010 and then again to 8.5% on 19^th July 2012. Why the sudden increase in demand so many months later? An explanation is given by FNB in their recently published  Property Barometer report where the human trait of “Recency Bias” is explained: People place a greater emphasis on recent events when evaluating risk, as opposed to events further in the past. The 2008/9 recession and high interest rates are thus likely being gradually forgotten, and more households’ confidence levels are increasing as a result, causing a greater interest in residential property. I would suggest that the only thing currently holding back the floodgates of demand is the availability of mortgage finance. Although banks have been very busy with unsecured lending, overall mortgage lending has grown by less than 2%. This is the key measure that has to improve before we will witness a noticeable recovery in residential property demand.

(Author: Andreas Wassenaar, published in The Bugle, 27th March 2013)

Rand Exchange Rate & Property Demand (The Bugle)

The Rand exchange rate weakness of late has become a hot topic of debate and a major concern for many businesses in South Africa that rely on imported components. While exporters do benefit on the one hand, in many instances imported equipment is extensively used by the same exporters making the net effect of a weaker Rand value somewhat watered down. Traditional wisdom regards the exchange rate value of a currency as a proxy for the share price of that country. If global investors feel confident about a country and its long-term future they tend to invest in the country, the net effect being a strengthening of the exchange rate as capital flows into the local currency. With South Africa relying on imported goods to such a large extent, a weaker Rand immediately filters through into inflationary pressure and higher prices for so many goods we make use of every day. Higher fuel costs is one such basic good, which in turn has ripple effects throughout the entire value added chain of an economy, especially in food prices and the transportation thereof. The idea that a weaker Rand can benefit us, has been peddled by some, but is essentially flawed. In an excellent article published in the Business Section of the Sunday Tribune newspaper on 17^th March 2013, John Loos obliterates any argument for a weaker Rand and demonstrates that even labour skills migrate to countries with strong currencies.  

This debate on the Rand exchange rate extends into the property market. As we frequently interact with both buyers and sellers who are based outside of South Africa, the value of the Rand does play a significant part on the decisions made by off-shore buyers and sellers. We are currently marketing a R6m property on behalf of a seller who is based in the UK, but who has homes in several other destinations and who tends to work in a US Dollar environment. Had he sold this property in May 2011 at a US$ exchange rate of R6.57 at the time, his hard currency proceeds would have been US$913,242. By holding on to the property, and should a sale have been concluded this week, at a US$ exchange rate of R9.19, his proceeds would now be US$652,884. This represents a 28,5% drop in the US$ value of the property over this period. So does the cheaper US$ price for our residential properties cause a flood of foreign buying? To some extent it will encourage this behavior, but there are further issues that every foreigner considers. These relate to the volatility of the Rand exchange rate and the future uncertainty – both political and economic that goes with it. Consider that in February 2009 the Rand Dollar exchange rate averaged R10.27. Big swings in the value of our currency create uncertainty about the future value. This discourages foreign buying. Furthermore, when the Rand is weakening, such as it is at present, prospective buyers may hold back on their decisions to buy anticipating even further weakness. A country and property market become attractive and competitive as an investment destination through fundamental things like higher labour productivity, laws that protect property rights, higher savings rates to fund fixed investment and higher levels of service delivery. Not, unfortunately, through a mere lower value of the Rand exchange rate.

(Author: Andreas Wassenaar, published in The Bugle, 20th March 2013)

7 Common Mistakes Sellers should avoid (The Bugle)

Having had the great privilege of being involved in the marketing and sale of high end residential real estate for almost two decades, and following on from the recent article in which 7 key things a seller should do to secure a sale were highlighted, it is opportune to provide insight to sellers, especially in the current buyers market, of the 7 most common mistakes to avoid. Selling a home can be an emotional event with prospective buyers invading your home, potentially criticizing it in your presence, and possibly even offering you a price well below your expectations. Apart from this process being time-consuming, it may be infuriating and draining. If I consider every transaction I have had the pleasure of assisting with, the single most important ingredient the property has to offer the prospective buyer is Value with a capital “V”, which brings me to the first mistake sellers make: 

(1) Setting an unrealistic price. Correct pricing is the single most important thing to get right. Realism and access to actual sales statistics of similar properties is essential. A detailed comparative market analysis by an experienced property professional is the starting point. This is best achieved by working with your estate agent of choice, which brings me to the second mistake sellers make: 

(2) Not contracting with an agent. Although estate agents command a commission, which can be as high as 7,5% (plus vat.) of the selling price, a top performing estate agent will add considerable value at every level of the sales process and will most likely be able to negotiate a considerably better outcome than a seller trying to DIY the transaction. Importantly the agent will be able to take the emotion out of the transaction for the seller which leads to the third mistake sellers make: 

(3) Becoming emotionally involved. Most residential homes are purchased on an emotional basis rather than a purely financial consideration. The property has to “speak” to the buyer. Buyers are in turn not overly sensitive to a seller’s emotional attachment to a property, and their criticism of a property can be very offensive. By distancing themself from the process and using a third party estate agent to assist them, a seller will avoid this emotional minefield.  The fourth mistake seller’s make: 

(4) Expecting to get your asking price. Every smart buyer will want and expect to negotiate on the list price. For a buyer to transact they have to believe they are getting a good deal. A seller should therefore set the price within the value range for the property and allow some room for negotiation. The state of the general market and the presentation of the property are factors, which directly determine the eventual pricing achieved. Absolute pricing of your home is irrelevant. It is the pricing relevant to the next best alternate for the buyer that is critical. The fifth mistake seller’s make: 

(5) Skimping on listing photos. Most buyers will first come across your home on-line and what they see there will determine if they even bother enquiring. The quality of the images of your home is an essential ingredient in the marketing and presentation of the property. If your estate agent does not use a professional photographer, contact one that does.  The sixth mistake seller’s make: 

(6) Not accommodating potential buyers. Once you make the important decision to present your property for sale, it is essential to make the property available for viewing, despite the inconvenience. The home has to be consistently clean and presentable and free from clutter. Prospective buyers will be put off by an untidy home. The seventh mistake seller’s make: 

(7) Contracting with an unqualified buyer. As estate agents our job is to present a willing and able buyer. The screening of prospective buyers is an important part of the process and can avoid extensive wasted time and cost to the seller.

(Author: Andreas Wassenaar, published in The Bugle, 13th March 2013)

Conflicting Commission Claims (The Bugle)

When it comes to the sale of residential properties and the question of estate agent’s commission, it is important for sellers to understand their obligations in terms of law to avoid conflicting claims to commission on the sale of their property and the risk of having to pay a double commission. The entitlement of an estate agent to claim commission from a seller depends on three general requirements having been met: 

(1) the existence of a mandate. A sole mandate has to be in writing to be legal and binding. An open mandate does not have to be in writing, but it is highly recommended as a matter of best practice and to avoid unnecessary miscommunication, that every contractual relationship is always reduced to writing. The relationship between a non-corporate seller and agent is subject to the Consumer Protection Act, which provides for the cancellation of the fixed term contract on 20-business days notice. It does however provide for a cancellation fee to be charged by the agent. It is not sufficient for an estate agent to merely know about a property that is for sale – the agent has to be specifically mandated by the seller. An agent may well be the effective cause of a transaction, but unless specifically mandated to sell the property would not be entitled to commission.

(2) Performance in terms of the mandate. This would require that the estate agent must have introduced a willing and able buyer, resulting in the conclusion of a binding agreement between the parties, and that the transaction and its terms are substantially in accordance with what the seller actually envisaged.  There has been some interesting case law around this aspect. In the case of Wynland Properties CC v Potgieter and Another 1999, an estate agent was given a mandate to sell a property at a very specific net price, and even though the agent introduced the property to the buyer he was unable to close at the net price and the buyer ended up buying the property privately at the net price. Most mandate agreements therefore include a clause, which provides for a commission to be earned on the sale at any price mutually agreed upon. 

(3) Effective Cause. It is this third requirement that often results in uncertainty and conflicting claims of commission. Reams of commentary and case law are available on effective cause. An interesting article published by Craig de Lange lists how the courts have described this “effective cause” in a number of ways: (a) The agent must be “the decisive factor” or the major cause (“causa causans”). It is not decisive that the agent’s mere introduction of the property to the buyer implies effective cause. (b) The agent’s efforts must have rendered the seller ready for selling at the agreed price and the buyer, ready and able to buy.  (c) The agent’s introduction of the buyer must remain “overridingly operative”, which indicates an on going an active participation by the agent.  (d) The agent’s actions have to be seen as sufficiently important in achieving the result for which the seller agreed to pay him for.  (e) Where a first agent has introduced a buyer to a property and a second agent has persuaded the buyer to purchase the property, the effective cause will depend on whether the first agent’s introduction still operated to influence the buyer to buy and upon the significance or importance of the part played by the second agent, in a causal sense, in relation to the conclusion of the contract. Interestingly it is therefore not sufficient for an agent to merely be a cause or provide some input to the conclusion of a sale – the agent has to be the overriding effective cause of the transaction.

(Author: Andreas Wassenaar, published in The Bugle 6th March 2013)