Bargains boost auctions

'To bid or not to bid — that is the question…' Hamlet's ambivalence in the famous 'to be or not to be' soliloquy is comparable to the quandary in which those considering buying property on auction have found themselves. Not only is there conflicting opinions about when to buy residential property from national as well as international experts, but buying on auction is often misunderstood. It then becomes daunting. Without a bona fide Nostradamus to predict market movements accurately, it all remains speculative. The further 100 basis point drop announced recently is however a positive move by the Reserve Bank to ease the mortgages of many borrowers and move one step closer to a property market recovery. There is one certainty though: Sale by auction is quickly becoming the preferred way to buy all property — not just the wave of sales from distressed mortgages.

So what is happening globally? In the USA sale by auction is bringing in billions of dollars. Across the country shrewd investors alert to outrageous bargains are beginning to stir. In California and Florida thousands of small investors are crowding auction venues. There are even 'foreclosure bus tours' with free champagne and onboard messages. Some analysts believe it’s the first wave of bargain hunters who will tell us when a housing recovery will happen. They are the ones diligently buying excess supplies and restoring some sort of equilibrium out of the chaos.

Optimism is as prevalent as pessimism

In the UK some experts predict that the market will never recover to its previous levels as it suffered greater depreciation than other countries. Others feel that there is a risk of another housing bubble because demand has not evaporated and once mortgage lending returns there is a danger that the huge demand will be unleashed resulting in ever increasing house prices again. There are even some that are predicting the decline will continue to the end of 2009 with a further 15 percent or even 30 percent drop to go. But nobody can predict with certainty exactly what is going to happen — optimism is as prevalent as pessimism.

In the USA auction companies will sell up to 5000 houses at one mammoth auction sale whilst in the City of London there are distressed auctions selling up to 500 houses a day. The sales are quick and efficient so the lender is able to monetise their defaulting loans immediately. And Australia is no different. A staggering 85 percent of real estate property is today sold by auction.

In this current economic climate where progress is measured in terms of a reduction in the decline in growth a conservative monthly German poll, far from brimming with optimism, has shown investor sentiment to have slightly improved.

Once-in-a-decade opportunity

Experts suggest that there is currently a once-in-a-decade opportunity to pick up residential property at bargain basement prices. Alliance Group, South Africa’s largest auction company, believe that with interest rates dropping and rentals strengthening there could be no better time to get into the market. One of the positive indicators that the residential property market is still active is that buying activity of distressed houses has surged.

Jacques du Toit, Senior Property Analyst at Absa comments: "The expectation is for the residential property market to continue experiencing relatively difficult conditions for most of 2009 despite declining interest rates. It is probably the time to buy property as an investment, taking into account demand and supply conditions and recent price trends."

Alliance Group also believes that 2009 will remain a tough year despite interest rate drops which have been having a muted effect. Throughout most of last year the sector of the residential market that was most affected were single residential units previously valued in the R1-million to R3-million category with particular problems in the secondary and leisure housing markets.

John Loos, Property Strategist for FNB, agrees, "Our FNB property barometer survey of agents suggests that as much as 26 percent of total selling could be in order to downscale due to financial pressure. So there is still financial stress and desperate selling. I expect non-performing loans of banks to start declining later in 2009, but that means that there will still be a high level of repossession and sales in execution for most of this year before it gets better. There is an opportunity for investors to climb in and scoop some desperate sellers’ properties."

And Rael Levitt, CEO of Alliance Group, believes that many of these will be residential developments, development land and incomplete developments. These are the sectors which will experience most of the pain this year. In mid-2008 the upper end of the residential market and particularly the luxury market over R10-million was not affected by the downturn as wealthy buyers continued investing in affluent areas. Now there is no doubt that these markets will be affected and whilst there is still muted buyer demand, it will be the buyers who will dictate prices."

Hordes of opportunistic buyers picking up properties at distressed auction floors

Distressed auction floors across the country are burgeoning and there are hordes of opportunistic buyers looking to pick up properties at lower prices. In the last downturn banks couldn’t give away distressed properties and had to keep them on their books as properties in possession. Shrewd investors know that at the moment they can get high rentals which offer a great investment while they wait for the market to rise. They are in a win-win situation.

"Now there are multitudes of buyers who have access to financing and see the current period as a period of opportunity as unprecedented volumes of houses hit auction floors," comments Levitt.

What is certain is that whenever you decide to enter the property market, buying on auction is the way to go. You only have to look at international trends to see that property going under the gavel is increasing at an exponential rate in sharp contrast to the snails pace of private transactions.

In South Africa, figures speak for themselves. Over 5000 buyers by auction in the last six months can’t be wrong as Alliance Group prepares to take more than 600 properties to auction in the next two weeks.

"House price deflation may start to bottom late in 2009 and that means that currently there is no better time to pick up real estate at lows which have not been experienced in South Africa in decades," adds Levitt. As investment guru Warren Buffet says, "Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it". According to Levitt, "we are urging all potential investors to go to our auctions to get an idea of the extent of bargains which are available. Now is the time to profit off the folly of the last five years' boom".

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