MORE STRESS FOR HOMEBUYERS

Oct 12 2007 08:45 AM
Tiisetso Motsoeneng
Johannesburg - South Africa's housing market will be hard hit by Thursday's interest rate hike, which brought the hikes since mid 2006 to 350 basis points, property experts said.
"The trend caused the debt servicing cost of households to increase to about 9.7% of disposable income in the second quarter of 2007, with this ratio expected to increase further on the back of the latest rate hike," said Jacques du Toit, a senior economist at Absa.
The SA Reserve Bank raised interest rates by 50 basis points on Thursday, surprising and disappointing some economists who had expected the central bank to leave them unchanged.
Du Toit said that the latest interest rate hike would further negatively influence the affordability of housing, and with debt servicing costs set to rise to higher levels, consumers' already stretched financial position would come under even more pressure during the next few quarters.
The 350 basis point rise in rates since mid-2006 has caused the average monthly repayment on a mortgage loan to increase by 24.6%.
John Loos, a property strategist at FNB, echoed du Toit views, saying that impact of latest interest rate hike on the residential property market "is quite significant".
"For residential property, I believe that this interest rate hike will keep the market on its broad deteriorating trend for the time being," said Loos.
Thursday's interest rate hike adds another R36 per month per R100 000 of mortgage debt, implying that for a R500 000 loan at prime rate a household will have to pay an additional R181 per month.
Additional amount payable following 350 basis points worth of interest rates hikes on a R100 000 loan is R245 and R1 226 on a R500 000 loan.
- I-Net Bridge

RATES HIT CONSUMER CONFIDENCE

Oct 09 2007 03:03 PM
Johannesburg - Consumer confidence declined in the third quarter of 2007 following recent interest rate hikes, but remained high by historical standards, a survey showed on Tuesday.
The confidence index compiled by First National Bank (FNB) and the Bureau for Economic Research (BER) was down to +18 from +21 in the second three months of this year, after scaling a record +23 in the first quarter.
The drop was largely due to consumers cutting back their expectations regarding the economy's performance over the next year, with a net 19% seeing performance improving compared with a net 25% previously.
FNB said the impact of two 50 basis point interest rate increases since the last survey, warnings of more hikes, and the introduction of a new credit law clamping down on lenders from June 1, had been expected to have a bigger impact on confidence than was the case.
Consumers largely still rated now as a good time to buy durable goods, it said.
"So, although consumers expect the economy to slow down in the near term future, they do not expect this to adversely affect their own finances and neither are they less willing to purchase durable goods," said FNB economist Cees Bruggemans.
South Africa's central bank has raised its repo rate by 300 basis points since June last year, taking it to 10% after hikes in June and August this year to tackle rising inflation, driven partly by robust consumer spending.
Analysts are divided on whether it will raise rates again on Thursday. A Reuters poll last week showed 12 of 19 economists expect rates to remain unchanged.
Bruggemans said consumers' ability to spend would likely deteriorate in the short term as the impact of higher interest rates is felt further, cutting the willingness to spend and resulting in a further easing in consumer confidence.
- Reuters

HOUSE PRICE GROWTH SLOWING EVEN FURTHER

Business Day
Friday, October 05, 2007 2:40:00 PM
By Nick Wilson
The slowdown in SA’s house price growth continued unabated last month as a result of a tighter economic environment and the influence of the new National Credit Act. According to the latest Absa house price index, the average house price in the middle segment of the market increased a nominal 14,2% year on year to R950000 last month. In August, growth of 14,8% was recorded.The residential market in SA has been on a gradual decline since late 2004 when house price growth, fuelled by strong economic growth and a low interest rate environment, peaked at more than 35%.A fairly expensive property market caused demand to drop off, which in turn led to a gradual decline in the rate of house price growth.In the first nine months of this year, nominal house price growth averaged 15,3%, compared to that period last year. Absa senior economist Jacques du Toit said yesterday the drivers of this downward trend were “tightening economic conditions, higher debt levels” and the effects of the National Credit Act. The act, implemented from June 1 this year, aims to shield consumers from reckless lending. Under the new legislation there is a far more stringent bond qualification process. Du Toit said people were finding it harder to qualify for mortgage financing. He said that based on the first nine months of this year, the bank was forecasting nominal house price growth of 14,5% for the full year. “We still expect a further downward trend in price growth towards the end of the year,” he said. Du Toit said the bank expected interest rates to remain unchanged when the monetary policy committee met next week. “We believe the Reserve Bank will leave rates unchanged. There are signs that overall demand in the economy is slowing and that growth in credit extension is also tapering off.“This may prompt the Reserve Bank to pause in terms of any further interest rate hikes at this stage,” he said. Property economist Francois Viruly, of Viruly Consulting, said that the residential market priced up to R700 000 was driving the residential market at the moment. Viruly said the rental residential market was “probably going to be an interesting market” to look at in the future. “We are going to start to see more rental increases. People are being pushed into the rental market, and the buy-to-let market is going to start performing much better in the next 12 months,” he said. This would be the catalyst “to get residential development activity going again,” Viruly said.After the property crash in the mid-1980s, house price growth of 7%-8% annually was recorded until 1999. But since 2000, house price growth had been almost 20% annually. The peak was in late 2004 when price growth reached more than 35%. According to August’s Absa house price index, the average housing price in the middle segment climbed by a nominal 14,6% year on year to reach R942800 last month. The rate of growth slowed from the 15,1% recorded in July.

RESIDENTIAL BUYERS GET A BREAK, SAYS STANDARD

October 9, 2007
By Roy Cokayne
Pretoria - Housing appears to have become a buyers' market, with residential properties taking longer to sell, according to Standard Bank.House prices rose 5.7 percent year on year last month, the bank said in its latest residential property report. Anecdotal evidence from property companies and other institutions suggested that houses remained on the market longer before being sold, and that the percentage of sellers who had to reduce prices to reach a deal had risen.It said the figure might indicate a cooling off in the housing market. Price increases might have stabilised between 5 percent and 10 percent.The property market had become less friendly for households in the past month or so. The August hike in the repo rate brought the total increase in rates to 3 percentage points since June last year and signalled an increase in mortgage rates, with mortgage repayments jumping by about 30 percent over the same period.The bank warned that this might not be the end of rate increases: further tightening of monetary policy when the Reserve Bank met this week, which was seen by some as a strong possibility, might change consumers' financial environment and thus the dynamics of the housing market. It said household debt as a percentage of disposable income edged to yet another record high of 76.6 percent in the second quarter from 75.9 percent in the first, but the rate of increase was slowing, perhaps indicating that the ratio was approaching a peak.The ratio of debt repayments to disposable income "increased from 11.5 percent in the first quarter to 11.8 percent in the second. Although this is lower than the 13.5 percent recorded in the third quarter of 1998 when the Asian crisis was at its most destructive, there is no doubt that some households are experiencing financial stress."But the bank said that, broadly speaking, it could be argued that the macroeconomic environment was benign. House price data were still reflecting underlying consumer resilience that stemmed from expansion in employment and income on the back of a relatively strong macroeconomic setting, it said. Gross domestic product grew a solid 4.5 percent in the second quarter.

PROPERTY CRISIS 'WON'T HIT SA'

Oct 04 2007 10:15 PM
Johannesburg - South Africa is unlikely to experience the housing market turmoil witnessed in the US housing market in recent months, a local property expert said on Thursday.
"[Investors] seem more concerned that we might go the same way as the US. Fortunately, I don't believe that we're going the same route," said John Loos, a property strategist at FNB.
His comments come as the US housing market crisis - which emanated from reckless lending of loans to borrowers who do not qualify because of their credit history - continue to unsettle investors worldwide.
Loos said that local housing affordability and household debt did not look too bad by historical standards, which supported a case for a more stable housing market.
"With the 90s history of extreme interest rate volatility and high rate levels still in memory of lenders, along with less securitisation, I believe that SA lenders are on balance prone to being more cautious for the time being," he said.
In 1998, the South African Reserve Bank hiked interest rates by 725 basis points in less than two months and the bulk of the SA home loans are not securitised but remain on the balance sheets of banks.
These two factors, according to Loos, help counter reckless lending in the country while in the US rates have been more stable and home loan securitasation has increased.
Home loan securitisation is a process where home loans are pooled and sold as financial instruments in the capital markets.
Another factor helping to counter reckless lending in SA is the National Credit Act (NCA), which was introduced at the beginning of June this year to promote responsible lending.
- I-Net Bridge

PRICE RISE NEAR 2010 STADIUMS

THE Johannesburg Development Agency (JDA), the development arm of the City of Johannesburg, is upgrading the areas around the 2010 Soccer World Cup stadiums and says these efforts are already affecting property prices in Bertrams and Doornfontein.
JDA CEO Lael Bethlehem says the agency is working on the Ellis Park and Nasrec precincts. The Nasrec precinct surrounds the FNB Soccer City stadium.
“In Ellis Park we are doing a huge amount of work upgrading the area,” Bethlehem says.
“In particular we are bringing in the new public transport system called Bus Rapid Transit into the Ellis Park area.
“This is a set of dedicated bus lanes that will allow the new buses to move very quickly.”
The Sunday Times reported earlier this year that the city’s R2bn Bus Rapid Transit system was expected to be in place by 2009 and that giant 160-seat buses would be introduced and would run in dedicated lanes on big roads.
Bethlehem says the JDA is also upgrading a portion of the nearby Bertrams area and will be upgrading a number of parks and sport facilities in that area.
The agency has also put in some public art at the intersection of Joe Slovo Drive and Saratoga Avenue.
“We have already completed revamping the Troyeville Park and we are going to be doing some residential developments in Bertrams, near to the Johannesburg Stadium, which is the athletics facility,” says Bethlehem.
She says the Johannesburg Housing Company , a nonprofit social housing institution, is going to develop a large residential complex in Bertrams at a cost of about R300m.
“I have no doubt that property prices in the Bertrams area, Lorentzville and Doornfontein are going to rise. In fact, they have already started rising.”
With the countdown having recently passed the 1000-day mark, Bethlehem says the JDA will have finished the work it has undertaken on time.
The JDA is also upgrading the Nasrec area because the international broadcasting centre for the Soccer World Cup will be there.
This is expected to bring large investments into the area, situated between Soweto and Johannesburg.
“We do have a land owners’ forum that the JDA chairs and which meets regularly, and a number of land owners there are looking at residential developments there, as well as hotels.”
The JDA is upgrading the area, including putting in new infrastructure, street lights and trees, Bethlehem says.
She says the Bus Rapid Transit system will also “open up” the Nasrec area “because one of its routes runs into Nasrec”.

INDUSTRIAL LAND 'A GOOD BUY'

Nick Wilson
During upswing, land appreciates faster than buildings
NOW is a good time to invest in vacant office- and industrial-zoned land, as land shortages and low vacancies in existing buildings drive values up, say property experts.
Property economist Erwin Rode, CEO of Rode & Associates, says that during an “upswing phase” in office and industrial property — such as now — land appreciates much faster than developed properties.
In his address to the annual Rode Conference on Property in Johannesburg last week, Rode said the difficulty was the shortage of zoned office and industrial land.
“It’s very good to bank in land, if you can find it ,” he says.
The residential market, on the other hand, “is fully priced and you don’t as a rule buy an asset that is fully priced”.
Rode expects residential property prices to grow at about the consumer price index inflation rate “for the next number of years”.
David Green, MD of commercial and industrial property brokers Pace Property Group, agrees that office- and industrial-zoned land is a good investment.
He says land values are skyrocketing for all types of commercial land .
Green says, for instance, the value of industrial-zoned land has risen 300% in the past 18 months.
Industrial land, which was trading in Midrand and other popular areas at R220/m², is now at R650/m² or higher.
“This applies to zoned retail, commercial and industrial land. All three sectors have seen enormous growth in value.”
Green says investment properties have not increased in value as much as vacant zoned land.
“The reason for the increase in the value of zoned land is due to the low vacancy levels ... (in) existing buildings and also the shortage of supply of land which is ready to be developed.
“It can take up to 18 months or more to rezone land from agricultural or residential to other uses, whilst the demand for zoned land is such that developers are not able to wait that length of time and therefore require land that is already correctly zoned.”
These factors have put upward pressure on land values.
“The increasing rentals ... in all the sectors have also made it possible for developers to pay higher prices for land and still achieve acceptable returns on new developments ,” says Green.
The price of office land differs from area to area, Green says. In Johannesburg, “the highest prices are being achieved in Sandton and Fourways, Sunninghill and Bryanston”.

CREDIT ACT CURBS BUY-TO-LET MARKET

Nick Wilson
THE National Credit Act , which came into effect on June 1 this year, will “severely restrain” residential buy-to-let investors and developers by ensuring these players receive credit only if they can prove they can afford it, attorney John Gilchrist says.
Gilchrist, a partner in law firm Gishen Gilchrist , says the new legislation will to a certain extent “freeze” the residential property market as fewer buyers will qualify for bonds.
Gilchrist, who was delivering a presentation at the annual Rode Conference on Property in Johannesburg, says skyrocketing residential property prices have trimmed back the number of buyers in the marketplace and the act will merely reinforce this.
“About 20%-30% of the residential property buying market has disappeared since 2004. This is due to the 200% increase in property prices over a five-year period. There is virtually nothing viable under R400000 today.”
Gilchrist says that about seven years ago, 20%-30% of the residential property market could afford property under R400000. “That market has virtually disappeared.”
The average price of a home then was R250000. The average now is R950000.
In this context, for most people, the act will “just complicate the qualifying process”.
“The (act) is just going to weed out the people who can’t afford credit and it will severely restrain individual investors and property developers,” says Gilchrist.
The legislation will reduce the number of people who will be able to invest in the buy-to-let residential market , and limit the number of properties they can acquire, he says.
“Previously, the way it worked was that banks would lend you up to 25%-30% of gross income. This meant they calculated 25%-30% of the gross income as a monthly bond instalment.
“Now, banks will be focusing on disposable income and looking at all outstanding debts.”
The new law is “good” and will have a “pruning effect”, Gilchrist says. “It means money only goes to people who can afford to repay it, especially in difficult circumstances.”
He says the qualification of buy-to-let investors for bonds before the act came into operation involved a bank simply looking at the monthly rentals achieved in the investment property in question and comparing them with the monthly bond repayments, rates, taxes and other levies. “They would have previously allowed 100% of the rental on average going towards qualification for the loan. Now this has changed and the banks won’t allow it.
“One bank has told me it will now only allow 40% of the rental on average going towards qualification for the loan.”
The act requires banks to check the overall credit exposure of borrowers before approving any new loan. It is aimed at protecting consumers from reckless lending.
Banks will be penalised if they have been found to have lent money to someone who cannot afford it.
In extreme cases of reckless lending, a bank could find that the debt owed to the bank is written off completely.
Gilchrist believes banks will “err on the side of caution” when it comes to implementation of the legislation .
FNB Homeloans CEO Jan Kleynhans says that when a bond application reaches the bank, it looks at disposable income to make sure the client can afford the loan .
“In terms of the buy-to-let market we will look at 100% of rental income provided that the income the customer declares from his existing buy-to-let property is verifiable against a lease agreement and other documents that support the costs of the lease property,” says Kleynhans.
“For example, if the existing property receives a rental income of R10000 a month and there are expenses of R2000 against that, this gives the customer a net rent of R8000. Let’s say the bond on that property is R7000 a month.
“The customer is left with R1000 before tax. Let’s say the tax is 40%, then he is left with R600. That R600 will be taken into account for the new bond that is being applied for.”

PROPERTY MARKET NOT IN FREE FALL

October 1, 2007
By Roy Cokayne
Pretoria - The residential property market is still solid, not in some type of "free fall", and "ready to respond" to any mildly positive news, according to the latest Lighthouse residential property index report.This was evident in the further mild increase in month-on-month price inflation - the fifth consecutive month of increase, it added. However, the report said the rise in national month-on-month inflation to 1.39 percent in May was not believed to be the start of a sustained upward trend. Instead, it had much to do with last year's transfer duty relief, which caused a flurry of additional buying activity as the year progressed.

"The month-on-month inflation downturn is expected to resume, driving year-on-year price inflation lower until early next year, with the figures still having to see at least two further interest rate hikes [June and August], as well as [the] National Credit Act implementation, have an effect."The report said the national house price for May showed year-on-year inflation of 18.2 percent, which did not represent any trend change, with the declining inflation trend since 2004 still intact.