Home Improvement Reasons (The Bugle)

Did you know that the strongest growth component of overall retail sales in South Africa, as measured and published by Stats SA, is the Hardware, Paint and Glass Products category. Having recovered from a huge slump in 2008/9 the 11% real growth rate for the 3 months to February 2014 for this category far exceeds the 3,6% growth in overall retail sales. Owners of a Build-It, Mica, Builders Warehouse or similar store should have nothing to complain about and should be doing better business now than experienced over the past few years. The obvious next question is why do people spend money on home improvement type products and what does this tell us about the expected trend in the property market cycle? On the reasons of why, FNB actually measure this accurately in their quarterly Estate Agent Survey conducted nationally. The overwhelming majority of people, 76% of all to be exact, do it for their own use. They enjoy the benefits of the upgrade for the future period that they remain in residence. This is always the best reason to undertake any upgrade and it is therefore not surprising that three quarters of this upgrading activity in our economy is driven by this motivation. A far lesser component, 16,5% of up-graders, do it because they can’t afford to buy elsewhere. A sensible reason in many cases as the transaction costs with buying and selling properties can be high enough to encourage a percentage of home-owners to rather add value to their existing homes. This can be a good idea but has a limit depending on the extent of the upgrade and the expected level of capitalisation of the property. A typical mistake made by many home-owners, is to over-capitalise a property for the given average pricing achievable in the suburb. Every owner eventually becomes a seller and it can then be a challenge to be able to recoup the capital invested in the home. The best gauge as to whether you are fully or over-capitalised with your suburb is the ask your local professional estate agent to provide you with a deeds office report on your property and on the suburb so as to understand what the last 20 homes geographically closest to your home have traded at and to get a handle on what the average price achieved in your suburb is. This type of data is readily available and in the public domain – you just need to know what you are looking for and how to interpret it.

A small percentage of people are currently undertaking home improvements as a speculative undertaking – measured at 6,5% of total home improvements. This is significantly down from the 24,5% measured for the same reason in early-2006, when the market was booming.

Improving confidence always precedes sales activity. We saw the FNB Home Investment Confidence Indicator shoot up from the third quarter of 2013. The home improvement activity followed soon after and the significant improvement in residential property sales, which we are currently experiencing, is a direct result of people feeling more confident about the future. The last measured quarter has seen a flattening of this confidence indicator and it will now be interesting to see what the interest rate hiking cycle does to retail sales of home improvement products and property sales in general.

Published in The Bugle, 30 April 2014, Author: Andreas Wassenaar

Activity Across Market Segments (The Bugle)

Which segment of the market is currently most active? This is an interesting question and the answer has changed significantly over the past year. If we consider FNB’s most recent estate agent survey report, and divide the market by income or price segment, labeling the Lower Income level at an average price of R885,000 , the Middle Income level at an average price of R1,37m, the Upper Income segment at an average price of R2,66m and the High Net Worth segment at an average price of R3,7m, we see that although the Middle Income is currently strongest, this is only by a small margin. There has been a significant narrowing of the gap with the Lower and Middle Income segments slowing slightly and the Upper and High Net Worth income segments improving significantly. Depending on what area or suburb of the country you may find yourself in, the definition of Upper Income and High Net Worth may vary. Zimbali has an entry level of R3,5m and High Net Worth purchases would be considered in the R30m plus bracket. If you were analysing sales data from the Atlantic Seaboard in Cape Town, these brackets would be even higher. Nevertheless, the general trends are similar and our experience on the ground as estate agents re-enforces exactly this improvement in activity experienced in the Upper and High Net Worth pricing segments. 

The recorded reasons for selling provide clues as to what is supporting the Middle Income level. We see that amongst the Lower Income level, as many as 26% of all sellers are selling to upgrade. These sellers are therefore typically buying in the income bracket directly above them, therefore boosting the Middle Income segment. The number of sellers who cite downscaling due to financial pressure as a reason for them selling is reasonably steady around the 16% for the lower brackets and around 13% for the higher brackets. This is a significant change from a few years ago when the Lower Income bracket peaked at 38% in the second quarter of 2009 as an estimate of the seller’s downscaling due to financial pressure. The High Net Worth category is typically least affected by the cyclical nature of an economy and the number of seller’s looking to downscale due to financial pressure has remained reasonably constant with a gradual downward trend evident. 

So what can we expect going forward? On the one hand we have a growing middle income class in the country and first time home-buyers dominating the lower income bracket. We also know that as of January 2014 we have entered into our interest rate hiking cycle, which is expected to continue through 2014 peaking in 2015. Because the lower brackets of the property market are more interest rate sensitive, being highly credit dependent, we should anticipate that as the cost of money increases, the lower brackets could begin to show signs of slowing. For developers who have been gearing up to service the market between R800,000 and R1,200,000 they may find that special attention is required to provide a competitive financing package. Downscaling due to life stage is a reason to sell that is far more prevalent in the higher income brackets and remains the single largest reason for selling. When it comes to price realism the lower income brackets still have an advantage. Measured by the average time the property is on the market, the Lower and Middle Income brackets indicate reported figures of 12,4 and 12,2 weeks respectively. The Upper Income and High Net Worth brackets recorded 18,2 and 18,4 weeks respectively.

Published in The Bugle, 23 April 2014, Author: Andreas Wassenaar

How Will You Measure Your Life? (The Bugle)

If Malcolm Gladwell, acclaimed author of New York Times bestselling titles such as The Tipping Point: How Little Things can Make a Big Difference;  Outliers: The Story of Success and more recently David and Goliath: Underdogs, Misfits and the Art of Battling Giants, is right it takes 10,000 hours on average to become an expert at something. This is my 200^th issue of writing this column and if on average it takes four hours to research and write each issue, then I have wracked up a reasonable 800 hours towards the 10,000 hour threshold at which time “expert” status can be considered. The more I learn, the more I realise how little I know, and it is this realisation that drives me forward to gain more understanding. Author’s such as Malcolm Gladwell or Steven Levitt & Stephen Dubner who wrote Freakonomics, Super-Freakonomics and Think Like a Freak should be compulsory reading for any serious student of economics. 

The great thing about a career in real estate is that it encompasses a range of skills and disciplines that takes a lifetime to master. The professionalisation of the estate agency business in South Africa has taken a giant leap forward in recent years with the education requirements imposed and the requirement to write an exam within a time frame in order to qualify as a practicing estate agent. I wrote this exam last year and found it an excellent exercise to go through and a tool that will add value to our industry over time. The number of young graduates that have been attracted to our Ballito office and who have committed themselves to a career in real estate is encouraging and indicative of the changing face of estate agencies. Young, hungry, smart and with a desire to make a difference in the lives of the people they interact with, while at the same time earning a respectable living is how I would describe them. When an industry goes from over 90,000 registered estate agents to fewer than 30,000 today you begin to understand how impactful the 2008/2009 economic downturn was. With fewer players in the industry but with turnover rapidly recovering, those that have remained and continue to have an impact in their areas of influence are now doing better than ever. 

For several years I have considered what makes for an excellent estate agent. Although women have a more natural empathetic attitude and can be great listeners, both important traits, men tend to be more analytical and legally minded. Top performing estate agents are therefore divided between men and women on the whole. I was pleased to discover that research has also indicated no clear personality pattern is evident across top performing estate agents – they range from very analytical leaders on the one side who drive a business forward to a socialising and highly supportive personality on the other. What does however seem to be an essential requirement for a top estate agent is a high level of emotional intelligence and the ability to comfortably interact across many different types of people. This chameleon-type quality is not a bad thing. It allows people to feel immediately at ease with the agent and connect at a mutually understood level. To consistently go the extra mile and way beyond the call of duty is something I have noticed that the top performing agents do. When all else is said and done, and in the words of Clayton Christensen, Harvard Business School Professor the world’s current leading management thinker, How Will You Measure Your Life? It all comes down to the difference you made to those people you interacted with on a daily basis.

Published in The Bugle, 16 April 2014, Author: Andreas Wassenaar

Property & Debt (The Bugle)

Property and Debt are so closely linked that it is useful for us to know and understand the extent and trend of credit growth in our economy.  Easy credit increases the demand for property and therefore drives prices upwards, while tougher credit availability tends to temper the demand and results in limited price growth and even price deflation. So where are we currently in terms of credit growth and availability and which way are we heading? The South African Reserve Bank measure and release this data and the latest figures for February 2014 indicate a further slowing of credit growth to 5,25% down from 5,6% in January. So credit growth for South African households continues to slow. Why can this be considered both a bad thing as well as a good thing? Slower credit growth means less demand for consumer durables – such as cars, which are typically financed and for property, which is also typically financed. If we look at the growth in residential mortgages we see that the growth in total residential mortgages outstanding in South African is only growing at a very mediocre 1,44% and that the real value of mortgages (adjusted for CPI inflation) has been declining at a rate of -4,1% per annum. 

This tells us that the new mortgages provided are to a large extent swopping debt between sellers and buyers and not actually providing any significant growth in net new mortgages. This is a bad thing for near term property demand. However for a medium to longer-term outlook for the overall property market it can be seen as positive. Why? As long as overall credit or debt grows at a rate less than disposable income, that key ratio we love to watch, the “Household Debt to Disposable Income Ratio” keeps on coming down. This is exactly what has been happening since early 2009 when this figure peaked at 83% and we are now down to 74,3% with this expected to reach 72,5% by the end of 2014. This is positive as it means that households are strengthening their balance sheets and as we now enter into an interest rate hiking cycle, South African home-owners are less vulnerable and can withstand economic shocks such as changes in income and a higher cost of money. This translates into a healthier property market characterised by normal buying and selling. 

The Reserve Bank’s monetary policy committee met at the end of March and decided to keep the policy repo interest rate unchanged at 5,5% for now, meaning that our prime interest rate remains unchanged at 9% after the surprise increase in January from 8,5%. The governor of the Reserve Bank has however warned that future increases can be expected during the next twelve months and that households should prepare for it. So what would be a reasonable response? If historical interest rate cycles can be used as a gauge then a 4% variation in interest rates can be considered. However, given that the peaks and troughs have been flattened and that the average long-term trend for interest rates has been downwards, most economists are forecasting a peak of only 11% in 2015 from the current 9%. In Rand terms, on your typical 20 year mortgage bond of R1m, this means an extra R1,325 per month. If interest rates were to shoot up by 4% points to 13% from the current 9%, this would imply an additional R2,719 per month. This starts to be more substantial and on top of this the additional costs of owning a property such as Municipal rates, electricity, water, Body Corporate and Estate levies, can be expected to increase. The best strategy is therefore to be a little more conservative in terms of the level of debt adopted and build in a comfort buffer. Shift debt away from consumer durables such as vehicle finance, which is based on a rapidly depreciating asset, to property, which is a steadily appreciating asset over time.

Published in The Bugle, 9 April 2014, Author: Andreas Wassenaar

Lower End Property Market Performance (The Bugle)

Last week we looked at the very high end of residential real estate in the country. It is now opportune to consider the very low end of the formal residential housing market. The areas formerly classified as “Black Township Areas” under Apartheid era classifications outperformed the former “White Suburbs” in terms of house price growth late in 2013 according to FNB’s Major Metro Township House Price Index. These prices rose by 7,6% year-on-year, slightly above the 7,1% recorded for the previous quarter of this township index and higher than the 6,2% recorded for the entire market in the 6 major metros across the country.

The growth in Township house prices has been marginally above the CPI inflation rate providing for some real house price growth and represents a solid market where demand is reasonably well balanced with supply. Because a significant portion of the country’s first time buyers enter the residential markets via established parts of the former township markets or via the Affordable Housing Developments programmes, we can expect economic conditions that impact on first time buyer activity to directly impact on this sector of the market as well.  For those who already own homes, news of increasing home prices is welcomed. However, those who are still looking to get into the market, rising prices caused by supply constraints would be a concern. Two major forces currently constrain the delivery of new homes within the township markets. The first is rising building costs. This is best measured by the Producer Price Index for Building Materials, measured at 6,64% at the end of 2013, which is down from the recent peak of 8,4% recorded in Oct 2013. The basic raw material inputs to housing delivery, being cement, bricks, steel, glass and timber are expected to experience increased upward pressure this year, which can then be expected to increase prices of new homes and limit their supply. The difference between the price of new builds versus existing “older” homes is best measured by the FNB Full Title Property Replacement Cost Gap – a statistic I love to watch as it indicates the difference between the average full title building replacement cost and the average existing full title property value, expressed a percentage of the existing full title property value. Currently at 22,6% this figure tells me that it is 22,6% cheaper to buy an existing (older) home than to build a new one. It is always going to be more expensive to build a new home than to buy an existing home, the difference merely changes with the cycle in the property market.

The other main force constraining the supply of new homes at the lower end of the spectrum is the extremely low growth in employment in the non-agricultural sector. The most recently available figures for the 3^rd quarter of 2013 show non-agricultural employment growth at a meager 0,17%. You cannot sell new homes to people who do not have gainful employment and disposable income.

The lower end of any residential property market is very credit and interest rate-sensitive. The general expectation is that our prime rate will increase to 10% from the current 9% level during the course of 2014 and then peak at 11% during 2015. Increasing interest rates have an immediate impact on the demand for residential property across the board but particularly for first time buyers targeting the entry level of the market.

The gradual long-term trend towards a higher portion of the country’s households being housed in formal housing will however continue. We have seen a gradual increase in this formal housing component from 68,7% in 1996 to 76,6% in 2012, and even though the pace is slow, it is steady and upwards.

Published in The Bugle, 2 April 2014, Author: Andreas Wassenaar