According to property economist, Erwin Rode, home prices are overpriced by 20 percent because in real terms, house prices haven?t been growing either.
According to property economist, Erwin Rode, home prices are overpriced by 20 percent because in real terms, house prices haven?t been growing either. Last year, Rode said house prices are 25 percent overloaded with no vigorous growth expected. He says houses are more sensitive to interest rates than commercial and industrial properties.
Looking at the medium-term prospects for house prices, Rode says growth over the next five years will be below inflation because of various reasons.
Firstly, he says in real terms, house prices are very high, townhouse property developers are active once again (as high prices still make new developments viable) and consumers are still under financial stress.
He points out that interest rates will rise because of Basel 111 impact and the interest rate cycle.
Furthermore, Rode says banks' increased aversion will continue.
What does this all mean then for someone looking to buy property?
According to Rode, renting is better than buying except if one is buying with cash.
He says letting a house currently is superior to buying for own use when one takes a five year view. The table below illustrates his point.
Buying a house worth R1m Renting a house worth R1m
100% equity 100% bond Rent outflow
Net present value of outflows (adjusting for time value for money) -R278 003 -R487 749 -R288 167 Slow growth
According to the FNB House Price Index, house prices showed a slight acceleration in its year-on-year growth rate (y/y) from 6.3 percent in July to 6.4 percent in August.
The report notes that the average house price growth of between 6 and 7 percent should not be seen as ?strong? given where the general inflation rate is.
Rode says this is not sustainable growth, noting growth of unsecured credit yet mortgage credit remains low, which means if housing finance is not available, this depresses house prices.
According to FNB, if one looks at house price growth since after the 2008/9 recession, one sees ?mini-surges? in growth.
As an example, Everitt explains that if a property owner waits to sell until prices rise again, the price of the next home they buy will probably also be higher, and they also run the risk of home loan rates rising in the meanwhile.
One was around 2010, in reaction to big interest rate cutting through 2009, and the second from late-2011 to date after a short lull.
The report reveals that the second mini-surge, has been far more sustained, despite demand growth actually being far more significant back in 2009/10 at the time of the first post-recession surge.
That the second mini price ?surge? has been more sustained than the first one is reflective of better market fundamentals this time around.
Gradual demand growth has slowly been mopping up the oversupplies (helped by very low levels of new building activity), household financial stress has gradually been reduced, and periods of real (adjusted for consumer price inflation) house price decline have slowly made house prices more realistic, explains John Loos, FNB household and property strategist. Buying property
First-time buyers who are still saving and searching for their perfect property may well have missed the bottom of the market cycle now, but that does not mean that they should give up on the prospect of homeownership, says Jan Davel, managing director of RealNet.
What it means is that these buyers should accelerate their home buying plans or risk having to pay a great deal more to get into the property market in a year or two.
?The bottom of any market is that theoretical period when the lowest home prices and lowest mortgage rates supposedly intersect, and we are past that point in most parts of the country now, because property prices have started rising in real terms,? he notes.
However, Davel points out that values are still well off the highs experienced in the last property boom, while home loan interest rates are still at historic lows, providing buyers with a home financing opportunity right now that is unlikely to occur very often in their lifetimes. According to Absa data, the monthly repayment on a R1 million bond is around 39 percent lower now than it was at the end of the boom in December 2008, thanks to the fact that the ?standard? home loan interest rate has dropped from 15.5 percent to 8.5 percent since then. ?First-time buyers looking at a bond of around R500 000 will have a monthly repayment of R4 339 compared to the R7 170 it would have been five years ago,? explains Davel.
Rode says this is not sustainable growth, noting growth of unsecured credit yet mortgage credit remains low, which means if housing finance is not available, this depresses house prices.
He says buyers will also need a household income of around R14 500 to qualify for the bond now, as opposed to the R23 900 they would have needed then (assuming, of course, that this income is not completely absorbed by other debt repayments and living expenses).
If interest rates rose again, a rise in the standard home loan rate of just one percentage point to 9.5 percent would boost the minimum monthly repayment on a R500 000 bond to R4 661 ? and the minimum household income required to qualify for that bond to more than R15 500, as an example, he says.
Davel points out that if property prices rise by 5 percent in the next 12 months, first-time buyers will need even bigger deposits, bigger bonds ? and bigger household incomes ? to purchase the properties they could have bought this year.
A R500 000 bond is likely to become a R525 000 bond, for example, and at an interest rate of 9.5 percent, that would push the monthly bond repayment up to R4 894. Selling property
According to Berry Everitt, managing director of the Chas Everitt International property group, the decision to sell a property should never just be about trying to time things in order to get the highest price.
Property owners also need to think about the ?opportunity costs? of staying on in a home they no longer want or which no longer meets their needs. As an example, Everitt explains that if a property owner waits to sell until prices rise again, the price of the next home they buy will probably also be higher, and they also run the risk of home loan rates rising in the meanwhile.
First-time buyers who are still saving and searching for their perfect property may well have missed the bottom of the market cycle now, but that does not mean that they should give up on the prospect of homeownership, says Jan Davel, managing director of RealNet.
In that case, they would most likely not only have to put any additional amount they made on their sale into the purchase of their new home, but also have to deal with higher monthly repayments than they had anticipated. ?If their reason for wanting to sell is to move to a home or area that would better suit their needs, hanging on to get a better price will probably also mean giving up on the shorter commute, the better school, or the change of lifestyle they were hoping for.?
Everitt points out that they might decide to pursue their goals anyway and just rent out their old house while waiting for prices to rise, but lenders might not be too keen on them carrying two home loans (even if the repayments on one are covered by the rent) and they will also need to consider the cost of maintaining two properties and paying two sets of rates and taxes.
?Sellers planning to sell need to take a view on the prospects of the property market in the next two years as well as consider that rising prices assist many owners who have been stuck in a ?negative equity? situation since the market crashed ? and who are probably more than ready to put their homes on sale now.?
According to Everitt, this will increase the supply of available homes and slow down house price growth even if demand stays at its current high level. New developments will further increase inventory and demand is also likely to show a decline when interest rates start to rise again.
He adds that property owners with equity in existing homes, should sell sooner rather than later, and secure a new home at current prices and interest rates. ? Denise Mhlanga