Residential Building Activity (The Bugle)

What is happening in the residential building market? Are people building more or less? What type of properties are they building more or less of? Which provinces are experiencing more or less residential building activity? What are the trends telling us? Up or down or sideways? If you are an estate agent or involved in providing any type of good or service to the residential property market, these questions would be of interest and could have an impact on your business. 

Stats SA compile excellent information on all of these key variables and make them available in report form. In October ABSA published their own analysis of these figures and this provides us with some interesting insights as to what is going on. Depending over which period you look at the data you will tend to draw slightly different conclusions. If you look at the changes in total building plans approved and total buildings completed on a three month moving basis the first thing you will realize is the recent downward trend in activity, which started in May 2013. This gives us some indication of the current trend. Given the recent slowdown in SA’s GDP growth it can be expected that households on average will hold back on new building. 

If we look at the cumulative figures for January to August this year and compare these to last year, we do see growth. The number of building plans approved grew from 31,698 to 33,943 (7.1%) and the building area (sqm) of these approved plans grew from just over 4million sqm to just over 4,5million sqm. (11,5% growth). If we look at the actual buildings completed over the same period, we see that the unit number was just about the same (no significant change) from 27,694 in 2012 to 27,518  in 2013. The total extent of building area completed grew from 3,11million to 3,23million sqm (January to August 2013). It is interesting that there is such a difference between the extent of approved plans and that actually built. Almost 1million sqm of approved building is still somewhere in the pipeline. Of the growth experienced in both approved plans and building area completed, the category described as “Homes larger than 80 sqm” is the largest by far but the highest growth came from the “Flats and Townhouses” category. To put it into perspective however, of the 3,23million sqm of building area completed from January to August this year, just under 2million sqm was for homes larger than 80 sqm and just under 800,000 sqm for Flats and Townhouses. As “Flats and Townhouses” would be predominately built by developers, while the category “Homes over 80 sqm” predominately by end-user home builders, it indicates how important the end-user home builders are to the industry and every professional or service provider to it. Large retailers of building materials and product (such as tiles and bathroom products) do well therefore to service both the end-users and the building trade. The growth in the Flats and Townhouses category also indicates that developers are significantly more active this year than last year.

(Author: Andreas Wassenaar, published in The Bugle, 30 Oct 2013)

First Time Buyers (The Bugle)

If you are a first time buyer you are part of a very important segment of the residential property buying market that actually drives the market. As first time buyers represent new entrants to the property market, this represents a net increase in homeowners. Repeat buyers are on the whole selling one property so as to purchase another and therefore do not on average therefore represent a similar net increase. It is therefore of interest to us as property professionals to understand first time buyer behavior and also look out for the economic indicators that would typically assist us in predicting the level of first time buyer activity in the market. We know that overall economic activity (GDP growth) and employment rate growth and general remuneration growth directly affect first time buying. As most first time buyers rely heavily on mortgage bond finance to be able to secure their purchase, their employment and disposable income status is all important in influencing the decision to take the first step in property ownership. I am a firm believer that real wealth is created over time through property ownership, and the sooner you get onto the property ladder the sooner you will be able to experience the beauty of watching your property value grow.  

Ooba, one of South Africa’s leading mortgage origination service providers has indicated in their September 2013 report that the average price for first time buyers was R674,590. The average cash deposit paid is currently 14.1% of the purchase price, which is down from 17,9% in September 2012 and down from 15% in the previous month. Many first time buyers lack accumulated savings at this stage of their lives, and the deposit portion often becomes the stumbling block to home ownership. However, we do know that 100% bonds are being granted, but we also know that the best financing terms are provided to those buyers who have a substantial deposit. Ooba reported in September that 53.7% of their total bond applications were from first time buyers and that on average these buyers were putting down an 11% deposit on their new homes. So how many of these applicants for finance are successful? Ooba does provide some insight into this with their average initial decline ratio of 47.2%. Of these 28.9% manage to secure finance from another lender, which takes the effective approval ratio to 66.4%. This is up marginally from the 65.2% recorded in September 2012. FNB reported this month that their estimate of first time buyers as a percentage of all buyers in the market is currently 20%, which is significantly up on the low point of 12% in 2007 but down from the 24% of the last quarter. Employment growth figures slowed to almost zero in the 2^nd quarter and general economic growth has tapered off over the same period. The gradual slowdown in first time buyer activity can therefore be anticipated. For new large scale developments along the Dolphin Coast that have been servicing this market, such as Sheffield Manor Estate, this type of information is useful as it indicates what their pricing strategy should be – i.e. keep it aggressive and attractive.

(Author: Andreas Wassenaar, published in The Bugle, 23 Oct 2013)

Property Surges against fundamentals (Ballito Mag)

Something unusual and exciting is happening in the property market. Unusual as most professionals working in the property industry have over the past five years adopted the over-supply of properties for sale and the imbalance between buyers and sellers as the new norm. We seem to have adapted to our changed environment post 2007 rather quickly. However, as we entered our sixth year of post boom trading something has happened which is exciting for residential property developers, estate agents, conveyancing attorneys and those institutions providing finance to this industry. We have experienced an impressive surge in demand and sales, which started in January of this year and has steadily gained momentum.

As Seeff Dolphin Coast we experienced our best first quarter trading since inception. Historically the summer months, and especially the first three months of any given year, provide for a seasonal peak in residential property transactions. We anticipated a drop off in the second quarter, and were equally surprised when the second quarter figures were double that of the first quarter. How did this happen? Part of it can be explained on a micro-level of a growing and focused local office, however it was not only our Dolphin Coast area in KZN that experienced this significant upsurge. Our other Seeff KZN branches reported similar sales growth and our large national branches along the Atlantic Seaboard, Western Cape Southern Suburbs, Sandton, Randburg, Pretoria East and Centurion all reported a similar surge in sales. Then came the clincher. In July 2013 as we entered our typically slowest sales period of the year, Seeff nationally reported the highest sales in over 70 months. The growth has continued into August and September and we are, nationally, approximately 20% higher than the 2007 peak. Regionally in KZN we are expecting a 30% growth over last year’s figures. We would love to explain this success as being part of our sales and marketing excellence alone, but the reality is that other large national real estate companies in South Africa have also experienced this amazing growth. The South African real estate market can now be described as being in its healthiest position post the 2009 recession.

So how do we explain this? Our traditional wisdom says that two main factors fuel a property market – the cost and availability of finance. The cost of money, as measured by our prime overdraft rate is currently 8,5%. It has been at this rate since 19^th July 2012, and before this at 9% from 18^th Nov 2010. This is a very long period of relatively low and stable interest rates. In our recent history interest rates peaked on 13^th June 2008 at 15,5%. As the recession took hold rates were reduced rapidly over 2009 and into 2010. However by now any economic stimulation caused by falling interest rates has worked its way through the market. We are therefore getting no additional benefit from a falling cost of finance. Has the availability of finance changed in recent years and could this explain the current activity in the property market? Leading mortgage originator Ooba, reported in August 2013 that bond approvals were up by 24% on a year-on-year basis. From the low point of August 2009, bond approvals are up by 227%. How much of this is Ooba’s relative strength rather than the overall market? There is no doubt there is far more finance available than in 2009 when the commercial banks almost shut their doors to new business, but overall mortgage extensions on residential properties is stagnant. According to ABSA’s report published in September of this year, the growth in the value of outstanding household mortgage balances in South Africa as at end July 2013 was unchanged at 2,7% and has been chugging unimpressively along at this level for the past year. As a matter of interest, the value of all South African mortgages together currently amount to R803,5 billion. This represents 60% of all credit balances (debt) in our economy. Once you understand this, you realize how important mortgage growth is to drive our property market. So with very little growth in new mortgages, the current demand cannot be explained by this.

Can the demand be explained by the growth in general economic growth? Sorry, again no. Our GDP growth according to the South African Reserve Bank, is expected to average 2% for 2013. GDP growth was 2,5% on average for 2012. The first quarter of 2013 was a shocking 0,9%, which rebounded to 3% in the second quarter. So if we do not have cheaper money, more of it, and if general growth is not driving this current demand in the property market, could it be that people in general are able to take on more debt with everything else remaining the same? The key household debt to disposable income ratio is an excellent measure of this capacity. Although this has come down from a peak of approximately 83%, it is still critically high at 75,8%, meaning that in general South Africans do not have much capacity to take on more debt.

The mystery of what is currently driving the demand therefore remains. A feasible explanation is that the market has started to price itself correctly with an equilibrium being reached between buyers and sellers. This means that if a property is priced correctly it will attract interest and be sold. Buyers have been sitting on the fence watching and waiting, and have finally realized, en masse, that the market trend is upwards and if they are going to secure a property at the best possible price, the time is now. They are seizing the day!

(Author: Andreas Wassenaar, published in The Ballito Mag, Oct 2013)

Market Trends (The Bugle)

There has been a flood of market data published recently which is always good to watch and analyze to be sure we have a sense of developing market trends. If you have been involved in residential property sales for a while, you soon understand the impact mortgage finance has on the market as the bulk of all transactions are subject to finance. ABSA’s credit and mortgages review shows that the August 2013 figures are stable regarding mortgage growth. South African households cumulatively have R807,1 billion in mortgages which is growing at 2,7% year-on-year. This amount represents 73.1% of all mortgages (the other being private sector corporate mortgages) and represents 60% of household credit balances. The other 40% of household debt is represented by secured and unsecured credit. Car finance and furniture finance are good examples. Unsecured short-term loans are an aspect of household credit that spiked recently but which has come down dramatically. This will not please the retailers who will notice this pull-back on their sales activity. 

The report on the holiday home market caught my eye as we sell many of these in the greater Ballito area. FNB’s estimated holiday property buying activity is currently at 2% of all buying. The buy-to-let figure has dropped slightly from 8% to 7% of all buying. Owning a holiday home or a second property is a luxury, which has come under increasing pressure over the past five years. Using deeds office data to identify properties owned by individuals where that owner owns more than one property, FNB estimate that approximately 16% of all properties owned are this type of second home or investment property. The growth in this type of ownership has been flat over the past few years. Primary residential home sales make up 90% of the market. The North Coast has seen a significant migration of permanent residents to its suburbs and gated estates, as the trend of moving northwards continues. Ballito and the surrounding areas are therefore increasingly becoming a primary residential market rather than predominantly a holiday destination. The outstanding road infra-structure, the commercial and industrial business parks, and the King Shaka International airport form a very convincing argument for the continued expansion of the North Coast.

The most recent estate agent home buying survey published by FNB indicated that the 3^rd quarter residential activity indicator did decline somewhat even though the general trend since early 2012 has been rising.  Around 15% of agents are reporting stock constraints. Along the Dolphin Coast this is prevalent in the R2m price bracket where demand exceeds supply. We have seen an interesting decline in the estimated average time that properties remain on the market prior to a sale. This is a measure of price realism. The 3^rd quarter figure was 14 weeks and 5 days. This is down from the 2^nd quarter estimate of 17 weeks and 1 day. This decline is therefore read as an improvement in pricing realism. A second measurement of pricing realism is the percentage of sellers who have to drop their price to achieve a sale and by how much this has to be adjusted. A marginal improvement was recorded here with 3^rd quarter figures indicating that 88% of all sellers have to adjust their price – down from 90% in the 2^nd quarter. The average percentage drop in asking price was recorded as 9%, slightly lower than the 10% recorded over the past five quarters.

(Author: Andreas Wassenaar, published in The Bugle, 16 Oct 2013)

Positive Signs for Residential Property (The Bugle)

As we enter the fourth and final quarter of the year, time seems to accelerate and within the next month the building industry and suppliers to it will be finishing off for the year. Whatever you need to get done from a home improvement point of view, aim to have it done within the next three weeks. It becomes almost impossible to get anything done the closer we get to December. For those involved in the holiday rental market, by now December is let with no vacancy signs being posted. We can expect another busy holiday season in Ballito this year. 

On the residential property sales market, it is best described as stable. FNB’s current house price index is showing year-on-year nominal growth of 6,6% (September 2013), up from 6,3% in August. This is basically in line with CPI inflation, and real house prices showed a slight decline of -0.11%. It has been almost six full years since the peak in real residential home prices in December 2007 with current real prices -20.2% down on that level. For those folks who bought property at the height of the market in 2007, it is still going to be tough to realize higher pricing in today’s market. I remember vividly in 2008/9 that market commentators were saying that the lower cycle of the market could last as long as five years. At the time this seemed like an inconceivably long period, but this is exactly what has happened. This year to date has been very positive for residential home sales but it is in the face of contrary fundamentals of low GDP growth (only 2% currently) and tight lending criteria imposed by banks who remain nervous. For me there are some very positive signs, which we should be aware of. 

The gap between demand and supply is narrowing. The best measure of this in the residential property market is the FNB’s Valuer’s Residential Market Strength Index. The demand rating has been slowly edging upwards and for the first time since 2008 has risen above the threshold 50 level, while the supply rating has been edging downwards. This movement to a position of equilibrium is good news and will translate into a property market where the stock, which is correctly priced and offers value, will tend to attract buyers. The next positive aspect is that interest rates remain relatively low at a prime rate of 8,5% and stable. In September the South African Reserve Bank’s monetary committee again resolved the leave interest rates unchanged. The general outlook is that interest rates will remain flat through to end 2015. This stability provides for a level of confidence in the market that the cost of money will remain manageable. Even though interest rates are higher than growth in house prices, meaning that any speculative buying will be very limited and buy-to-let activity will also be subdued. As an astute property investor you should celebrate this as it means that you can actively shop around for the best deal on an investment property without the disruption of too much competition. When buying an investment property, restrict your decision-making criteria to the initial gross rental yield only and exclude your estimate of future capital growth.

(Author: Andreas Wassenaar, published in The Bugle, 9 Oct 2013)