Property overpricing slows down sales (Denise Mhlanga: 27 Nov 2013)

3 Dec 2013

With the continued low interest rate environment, those with easy access to home loan finance or cash in hand will buy at the right price.

According to Denis Quayle, owner of the four Harcourts Maynard Burgoyne real estate offices in Cape Town, many sellers at the upper end of the property market are still clinging to price expectations that are out of touch with market realities.

Quayle points out that the high cost of living is making it difficult for many buyers and even those in the higher income groups are very value conscious at the moment.
“Some sellers have a skewed idea of what their properties are worth in the current market and are slow to take advice from experienced estate agents on market-related asking prices,” he says.

As a result, Quayle says their determination to achieve certain asking prices often comes at a high cost as their properties take longer to sell adding to the holding costs that sellers have to carry during this period.

As an example, he says, the Institute of Estate Agents of South Africa (IEASA) property statistics for the year to end of August show that properties in the Cape Town suburbs of Bergvliet, Constantia, Diep River, Kirstenhof. Plumstead and Tokai took an average of 92 days to sell and that, on average, selling prices were 12 percent lower than the original asking prices.

Furthermore, data also show that upmarket Constantia recorded the biggest average difference between asking prices and selling prices (14.49 percent) and that homes in the area take almost double the average time to sell (166 days), explains Quayle.

Constantia properties listed at prices below R3 million stayed on the market for an average of 126 days and sold for an average of 10.23 percent less than asking price and those listed at between R3 million and R5 million took an average of 127 days to sell for 13.14 percent less on average than the asking price.

Properties priced between R5 million to R10 million sat on the market for an average of 214 days and sale prices were 11.82 percent lower on average than asking prices, while those priced above R10 million saw an average price differential to nearly 20 percent sitting for an average of 276 days, according to IEASA data.
According to Denis Quayle, owner of the four Harcourts Maynard Burgoyne real estate offices in Cape Town, many sellers at the upper end of the property market are still clinging to price expectations that are out of touch with market realities.

Quayle says that of the seven suburbs analysed, Constantia did show the highest number of sales for the 12 month period at 188 units, indicating that Constantia remains a highly sought-after suburb, however, buyers are savvy and know all about market value and are prepared to negotiate hard – or keep looking - in order to pay only what they regard as a fair price.

He therefore warns that serious sellers wanting to sell their properties quickly should take advice from experts and also read the market well before putting their homes up for sale.

While some sellers are reportedly asking ridiculous prices for their homes, sellers in the City Bowl and Southern Suburbs of Cape Town, as well as in the middle-class suburbs of most of South Africa’s big centres sellers are having a party.

Wayne Albutt, Rawson Property Group’s Western Cape regional sales manager, says they are seeing stock shortages especially in big metros and homes that are priced right sell within six to eight weeks, with prices also rising meaning those who don’t buy now can expect to pay more in three to six months.
Albutt says suburbs including Constantia, Tokai, Bergvliet, Melkbosstrand and even outlying towns like Paarl, have all experienced unprecedented growth in sales activity.

House prices

In House prices and property investments, house price growth remains in single digits and is expected to remain in this territory in 2014.

The Absa Housing Review Q4 2013 reveals that nominal year-on-year (y/y) house price growth in the middle segment of the market (homes measuring between 80 and 400 square metres and priced up to R3.8 million in 2013) slowed down in the third quarter of the year from the second quarter, with lower price growth evident in all middle-segment categories.

In real terms, (after adjustment for the effect of inflation), y/y house price growth in the middle segment was lower in the third quarter compared with the second quarter, driven by a combination of lower nominal price growth and higher inflation.

Although barely positive, lower nominal y/y price growth occurred in the category for affordable housing in the third quarter of the year from the second quarter, whereas price growth in the luxury segment improved further in the third quarter.

Jacques du Toit, Absa Home Loans property analyst, explains that the nominal price of a property refers to the price at which it was valued or transacted on the open market (the market price, selling or purchase price).
The nominal price will be reflected in a valuation, an offer to purchase, an application for mortgage finance and in the transfer documentation at registration, he says.

The real price of a property is the nominal price adjusted for the effect of inflation, and is calculated to determine if the value of a property has increased at a rate of above or below the inflation rate.

“In addition to the nominal price, real price trends and growth are important from a property investment point of view,” says Du Toit.

Regional house prices

House prices at a regional level continued to show relatively strong growth in a number of areas in the third quarter of 2013 with prices along the coast growing by a nominal 13 percent y/y, mainly as a result of base effects after being in a state of deflation from late 2011 up to mid-2012 and showing only marginal growth in the third quarter of last year.

Du Toit points out that general economic trends have an impact on the performance of the residential property market at geographical level, but these regional markets may react differently to these developments as a result of various area-specific factors, such as location, physical infrastructure and the level and extent of economic development and growth.

He says as a result of these trends in the average price of new and existing homes, it was as much as R672 400 or 37.1 percent cheaper to have bought an existing house than to have a new one built in Q3 2013.

“These factors may affect property demand and supply conditions, market activity, buying patterns, transaction volumes and price levels and growth.”
New and existing housing

The average nominal price of a new house for which Absa received and approved applications for mortgage finance increased by 14 percent y/y to about R1 811 300 in Q3 2013, after rising by 10.6 percent y/y in Q2 and in real terms, the average price of a new home rose by 7 percent y/y in Q3 from 4.5 percent y/y in Q2.

He notes that the acceleration in the average price of a new house is as a result of the increase in building costs over the past three quarters compared with a year ago.
The average price of an existing house increased by a nominal 8.4 percent y/y to R1 138 900 in Q3 after rising by 11.1 percent y/y in Q2.

Real price growth of 1.8 percent y/y was recorded in Q3 with regard to existing homes down from 5 percent y/y in Q2.
He says as a result of these trends in the average price of new and existing homes, it was as much as R672 400 or 37.1 percent cheaper to have bought an existing house than to have a new one built in Q3 2013.
In the past it has been observed that high priced properties grow at a slower rate than low value properties, according to data. – Denise Mhlanga