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 19th July 2012, and before this at 9% from 18th
Nov 2010. This is a very long period of relatively low and stable interest
rates. In our recent history interest rates peaked on 13th 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)
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