Invest, don’t speculate

The main reason for this, according to the FNB property barometer, is that buyers’ real interest rate — the difference between the rate they pay on a home loan and the rate their house price rises — is no longer the -25% it was in 2004 and 2005, when home loan rates were 10% and house prices were rising by 35%. Today, prices are rising by about 7% while home loan rates are about 9% .

“Much of the buy-to-let buying was probably more speculative by nature, with many buyers looking for rapid capital growth and very short-term gains,” says FNB property strategist John Loos.

Speculators would buy flats in a new development off-plan and apply to different banks for individual home loans. They aimed to offload those properties at a profit when the development was finished. It was money for nothing and it seemed like it would last forever — until it ended in tears in 2008. The bond market dried up, the speculators were left with unsold units and they were unable to meet their debt obligations.

It’s difficult to separate investors from speculators. Loos assumes speculators have been knocked out of the market. “My guess is that all but 7% of sales are to genuine buy-to-let investors,” he says.

Rental yields are languishing, he says, with rents in Johannesburg up by less than 3% this year and falling in Durban, so there isn’t much to attract investors .

The remaining investors successfully built buy-to-let portfolios during the boom. The record low interest rates — for some as low as 7% — and moderately rising rents give them the power to buy more properties .

Their presence in the market throws the illogic of speculation into high relief. A flat in Johannesburg bought for R300000 in 2004 is worth R400000 a year later. The speculator sells . After deducting R25000 for commission and about R26000 in income tax , he is left with R49000 profit.

An investor taking a long view also purchases a flat worth R400000. His rent is R3000/month, his levy R600 and his bond repayments R3000, which means he has to feed R600/month into the investment.

The following year his rent is R3300 and his reverse cash flow is down to R300/month. He can increase his bond by R49000, have the same amount of money in his pocket as the speculator — and still own the property with all its future benefits.

Within a year or two he will have a positive cash flow , though some of that will have to go into repairs, and in a decade his property will be a cash cow.

Some wily speculators have survived. But they have moved out of the estate agent market. They are at auctions buying the properties of the financially distressed at discounts of 30% or more. They are making their profits up front and will continue to do so for a year or more .

Anton de Leeuw is CEO of YDL, a buy- to-let investment adviser and educator who recently turned to facilitating auctions. “We and our investors agree that long-term investment is the right philosophy,” he says. “But they have started speculating in auction property to build extra equity. It’s a short-term diversion while the discount opportunities are available over the next year to 18 months. ”

Loos reckons that, with rising rents, mildly strengthening prices and relatively low interest rates, the proportion of buy- to-let investors in the SA market could grow to 10% in the near future.

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