Debt: Good or Bad? (The Bugle)

I often find it surprising how low the average approved mortgage bond is when our house prices are generally more substantial. Ooba, South Africa’s leading mortgage originator, recently reported that their average approved bond size is only R818,955. This is on an average purchase price of R947,086. First time buyers currently represent 25% of all buyers in the market, but according to Ooba make up 51,3% of all Ooba’s bond applications. This is incredible and gives us an understanding of how key this segment of the market is. If you are a mortgage originator or finance provider your product offering would therefore be tailored to a large extent to address this first time buyer market. The average age of an Ooba applicant is 37, and 47,5% will be declined by the first bank they make application to. However, 27% of those who are declined by one bank will be approved by another, meaning that Ooba’s effective approval ratio is 65,3%.

We know that currently total South African household mortgage balances are R816,7bn, growing at a subdued rate of only 2.3% year-on-year. This represents 72,6% of all mortgage balances in the country indicating how important residential mortgages are in the bigger picture. I regard mortgage debt as generally “good” debt, as it is typically long term in nature and used to finance a growing asset. However, households borrow money for more than just mortgages and 41% of all household credit balances (i.e. their debt) are in non-mortgage related finance such as instalment sales, leasing finance, overdrafts, credit card debt, personal and micro loans. Unsecured lending that grew exponentially during 2012 has fallen back dramatically, much to the dismay of micro-loan finance providers such as African Bank and Capitec. Economists are however relieved as the perceived bubble in unsecured lending was like a time-bomb waiting to explode. Unsecured lending (general loans and advances, credit card debt and overdrafts) is typically on consumption expenditure and this makes it dangerous and the type of debt I would refer to as “bad” debt. This type of debt is still growing at 7,3% year-on-year but significantly down from the 31,6% recorded in November 2012. 

So when is debt “good” and when is it “bad”? The beauty about investing in property is that there exists a mortgage bond market to readily finance this asset class at reasonably competitive interest rates and terms. This allows you to easily buy an asset with part equity (cash) and part debt and thereby leverage your purchasing power. It is good when used in a way that matches your ability to service the debt. You should always consider a “what if” scenario – if you had to sell the property quickly by reducing the price, would you still be ahead? You would be if your loan to value ratio was relatively low, say 50%, and kept at these low levels as part of your long term investment strategy. Once you have a property with an access bond facility active on it, this becomes an excellent savings vehicle as the effective rate you earn by depositing extra cash into the mortgage facility is equal to the bond rate, currently at 9%. 

Published in The Bugle, 2 July 2014. Author: Andreas Wassenaar

12 Reasons Why I am a Property Optimist (The Bugle)

Are you an optimist? Stephen Covey introduced us to the 90/10 Principle. This idea says that 10% of life is made up of what happens to you – the things you cannot control, but that 90% of life is decided by how you react, and this you have complete control over. As a property professional there are things I have no control over. Interest rates, striking miners impacting on our gross domestic product, or a global financial crises. While it may be instructive to be aware of what is happening outside your sphere of influence so as to be ready for the opportunities that may present themselves, it is of little value to dwell on these things. 

I was recently asked if it was a good time to sell and emigrate. I was surprised by the question as my mindset could not be further from this frame of thought. I cannot think of a better time in our recent history to be part of the poised growth of Africa and to have the privilege of living and working in South Africa. The hammering of our recent gross domestic product growth and the recessionary talk that has been pervasive in our media simply spells opportunity to me. 

I will talk you through 12 current key property economy statistics and explain why I interpret this data as positive and an opportunity to profit through property: 

1. Household sector real disposable income growth hits 2,5% representing a steady decrease over the past two years. I note this but realize the flip side is that property prices will remain subdued which helps me find the best possible buys. 

2. Household Debt to Disposable Income Ratio down at 74.3% from the peak of 83% in 2009. This is a big improvement and means that household balance sheets are stronger. Interest rates at 9% remain the lowest in 40 years. 

3. FNB Residential Demand Strength Index is steadily up from 2009. 

4. FNB’s Residential Market Activity Indicator hits 6.76 – a level closer to the pre-2009 recession levels – good news! 

5. FNB Residential Supply Strength Index – moving up and still stronger than demand indicating overall adequate stock levels and new stock coming on stream. 

6. Agent Stock Constraints reported by 18.5% which is the highest over the past 7 years indicating the people are buying up the stock of existing properties and the back-log of homes is shrinking. This will mean that homes that have been on the market for a while in certain areas should now be trading.  

7. Average time a property is on the market (nationally) sharply down to 13,6 weeks and heading downwards. 

8. Proportion of properties sold at less than their asking price is now 81%, which is down and heading south supporting the view of increased demand being prevalent. 

9. Average percentage drop in the asking price to secure a sale is down at 8% - a big improvement on the 13% recorded in 2011. 

10. Affordability of housing has steadily improved over the past 7 years as measured by the average house price index over average labour remuneration.  

11. First time buying activity is now at 25% and growing – a sign of a more active property market. 

12. The proportion of buyers buying to let is slightly higher at 9% (from 8%) but remains low, which is a great buying opportunity to take advantage of the higher rental yields.

Published in The Bugle, 18 June 2014, Author: Andreas Wassenaar

Property Up, GDP Down: Is this sustainable? (The Bugle)

We have an interesting anomaly that has developed recently. Our property market has remained buoyant in the face of a deteriorating general economic outlook. Our sales figures are up while GDP growth rates are down and the SARB Leading Economic Indicator is showing a further weakening in the near term. To some extent we can explain this by suggesting a level of pent-up demand is now after six years of flat price growth, being released. It was a relief that the May meeting of the Reserve Bank’s monetary policy committee decided to keep interest rates unchanged despite CPI inflation breaching the 6% upper target limit range. This counter-cyclical evidence is unusual and raises questions as to the sustainability of the current demand surge for property that we are experiencing. Transfer duty receipts by the government is an excellent way to measure the property cycle and by watching these figures closely we can get an indication of when the general trend reverses and we start heading in the opposite direction. The April figures published at the end of May still showed robust growth in transfer duty receipts, with year on year growth rates at 24,3%, but slightly lower than the 25,7% of March and significantly lower than the 49,4% recorded in January 2014.  The current sideways movement in transfer duty receipts growth rates is expected to change to a slowing growth rate during the second half of 2014. If you were to analyze the last 100 transactions through our office you would find the average time between date of sale and date of transfer is 90 days. Any slowing in property sales activity would therefore typically be noted three months down the road.

Even though the FNB House Price Index showed growth of 8,1% in May 2014, up from 7,9% in April, economists are warning us that there are indicators that suggest a slowdown in growth rates is looming. When clouds begin the gather you need to understand the potential risks and opportunities that may present themselves. We saw that real economic growth for the first quarter declined by  -0,6% - the worst quarterly performance in five years. The impact of the Platinum miners strike has made itself felt. When 70,000 relatively well paid miners strike for a lengthy period, the cumulative impact on the economy can be surprisingly severe. Retailers exposed to the purchasing power of this group would most certainly have experienced a dramatic drop in sales. Disposable income is another key statistic that has been on the decline. Compensation to employees measured a 7,85% year-on-year rise in the first quarter of 2014, representing a third consecutive quarter slowdown. When people have less money to spend, we can expect decisions to buy properties harder to make. Herein lies the opportunity. The buyers market will continue, rentals will continue to rise and pricing will remain relatively flat. All great news for property investors. I have already identified the best buy-to-let opportunities and yields are edging upwards.

Published in The Bugle, 11 June 2014, Author: Andreas Wassenaar

Voetstoots Clause and Fraudulent Misrepresentation (The Bugle)

Having been involved in the property industry for twenty years, I have been exposed to several legal disputes over this time and find it interesting to read current case law relating to property transactions. Very often disputes will arise around the quality of a home and the latent defects that come to light after the parties have contracted. The old Roman-Dutch principle of voetstoots (buyer beware and that you buy the property as it stands with all its faults) is often at the heart of the claim. Sellers love to quote a voetstoots clause when faced with a complaint from a buyer, often not fully understanding the extent of liability that can be attached to them. 

We recently experienced a situation where a seller, fully aware of defects, attempted to hide behind a voetstoots clause contained in an agreement. Only after intervention from a third party attorney brought into the matter by the estate agency, was the matter resolved and the Seller forced to provide a measure of compensation. Recently the Supreme Court of Appeal considered this exact same principle of voetstoots in regard to the sale of a house with a thatched roof that leaked, as reported by attorneys Garlicke&Bousfield in their informative Law Letter publication.  Where a sale is subject to a voetstoots clause, the seller is not liable for latent defects, which manifest themselves after the sale unless the purchaser can show that, at the time of the sale, the seller was aware of the defect and fraudulently concealed its existence. The court found in this case that there were two defects in the roof, which were latent but that the seller was excused liability by virtue of the voetstoots clause because the purchaser had not proved that the seller had had knowledge of the defects and had concealed their existence. The seller had effected repairs to the roof prior to the sale. The purchaser then however raised the question whether the seller had knowledge that these repairs had been adequate to ensure that the roof would not leak. The seller contended he believed so as his insurance company had continued to provide cover and was satisfied with the repairs. To cover the purchaser from possible future problems, the parties had signed an addendum whereby the contractors guarantee would be transferred from the seller to the buyer. The evidence showed that the seller had known that this was a limited six-month guarantee and had in fact expired at the time of signing the addendum, thereby indicating that he did not believe the repairs to be adequate to stop the roof from leaking. Concealing the absence of a valid guarantee was deemed to be fraudulent and the seller thereby forfeited the protection of the voetstoots clause. Judgement was granted in favour of the purchaser for an amount of just under R450,000. 

The golden rule is to treat others as you would like to be treated. Sellers should not try to hide behind voetstoots clauses when it comes to latent or patent defects. Buyers would be well advised to employ and pay for professional Home Check inspectors to provide them with a detailed report prior to finalizing the sale agreement.

Published in The Bugle, 4 June 2014, Author: Andreas Wassenaar