16 Jan 2014
Home prices will rise in 2014 in the face of a growing shortage of stock, but increases will be tempered by affordability constraints, says Richard Gray, chief executive officer of the Harcourts Real Estate group.
Gray explains that a year ago, there was an oversupply of property, but this has largely been sold, especially in the metropolitan areas, and we are actually experiencing a shortage of homes to sell in many of the most popular suburbs.
“Demand is to a large extent being driven by the increasing number of first-time buyers coming into the market and freeing-up existing owners to upgrade or just move elsewhere.”
However, there has also been much activity in the past year at the upper end of the market, with high net worth individuals deciding that the time was right to acquire multimillion-rand properties before values really start to climb again.
The growing stock shortages will undoubtedly drive prices higher over the next 12 months, despite substantially increased activity on the part of developers, says Gray.
“Building input costs are high and – according to Absa - it is currently about 37 percent more costly to build or buy a new home than it is to purchase a similar pre-owned home, so even when a developer does add new stock to a suburb, it is likely to be priced at more than the surrounding homes and so have no depressing effect on local prices.”
Harcourts expect sales and price increases to be constrained in the coming year by affordability issues.
“The current low interest rate cycle is of course aiding affordability and the financial institutions do appear to have an increasing appetite for mortgage lending.”
Gray points out that household debts remain high and this is limiting the ability of the banks to lend because existing debt commitments reduce the percentage of disposable income that prospective buyers have available to cover the monthly repayment on a home loan.
“Buyers who cannot qualify for the home loans they want then either have to postpone their homeownership plans while they reduce their debts and save up a big enough deposit, or lower their sights and buy a cheaper property.”
Banks are still very conservative in their valuations of the properties for home loan purposes, so he says they do not expect to see much upward movement in house prices despite all the additional activity in the market. Meanwhile, Gray says banks have no desire to see new homeowners find themselves in a negative equity situation - as so many did following the 2009 recession and property price collapse – so they remain conservative in their property valuations when granting home loans, and this is also acting as a brake on price growth. Demand to rise faster than prices In real estate terms, 2014 should see the market continuing to strengthen and build on the gains of the past two years, with stock shortages growing and homes selling much more quickly in response to rapidly increasing demand, says Berry Everitt, managing director of Chas Everitt International property group. Everitt notes that in spite of the sluggish economy and declining consumer confidence, every month sees more prospective buyers streaming into the market. “SA’s population is growing and there is also massive pent-up demand because of the slow rate of new housing development from 2009 until late last year, as well as the tight credit controls exercised by the banks for the past five years.” He says there is also a strong sense that the current very low interest rates will not last more than another year, and that prices will start to increase more rapidly as stock shortages grow even more acute, especially in the most popular suburbs of the big cities and metros. Everitt points out that many of those who are keen to buy now are still not in a position to qualify for a home loan and will have to continue to rent until they can reduce their debt load or perhaps save a deposit - and that, in turn, is encouraging buy-to-let investors to add further properties to their portfolios. “Consequently, we expect to see the overall number of sales continue to climb in 2014, facilitated by an increased appetite on the part of the banks for long-term lending such as home loans.” While it is true that banks are granting more home loans at the moment than at any time in the past five years, this should not be read as an indication that they have relaxed their lending criteria. “Rather, it is just a reflection of the fact that there are now more prospective borrowers for them to choose from,” he says.
Due to residential property prices rising quite dramatically in the last few months, banks are having a difficult time finding full value in the properties they are asked to finance. Banks are still very conservative in their valuations of the properties for home loan purposes, so he says they do not expect to see much upward movement in house prices despite all the additional activity in the market. “Our expectation is that values will grow by around 10 percent this year in the most sought-after areas, and less in areas where there is less demand and / or no stock shortage as yet. “Revenue growth, which has been very strong for the past two years, will thus continue to come mostly from increased volumes of sales,” according to Everitt. Bank valuations challenges According to Wayne Albutt, the Rawson Property Group’s regional sales manager in the Western Cape, there is a very real possibility that bond awards will drop in the next few months. This is due to residential property prices rising quite dramatically in the last few months, which in turn is making it difficult for banks to find full value in the properties they are asked to finance. The latest Absa report indicates that middle sector housing has been rising at over 9 percent year-on-year. In these conditions, says Albutt, on-the-ball estate agents need to push for high deposits and prepare themselves for ongoing negotiations with banks to justify and validate the prices they are achieving and subsequent increased values. He says if the estate agent has been well-trained in comparative market analyses, he or she can often prove to the bank that the sale price achieved is correct and this is sometimes difficult for the bank’s assessors who have to deal with larger geographic areas to understand the value of any one specific area when they may not have been as closely involved as a leading or resident agent. Quoting one example, Albutt says where recently a property was sold for R4.75 million, the buyer, although having access to a healthy deposit wanted a 100 percent mortgage, nearly lost out on the purchase due to the bank only finding an initial value of R4.4 million. The astute agent contested the bank’s initial assessment and provided more recent comparatives of sales and values achieved in the area whereafter the bank granted the 100 percent bond. “This type of liaison, professional action and agent behaviour is going to be especially necessary in the coming months, but the good news is that we have found banks to be ready to listen and to make sound decisions when presented with well-researched facts,” he adds.