Interview - JACQUES DU TOIT: Senior property analyst, Absa

MONEYWEB: Dave, we've gone from a subject that everybody has one of - a cellphone. Unfortunately some of us are on contracts. I still think on contracts you get ripped off, hey? Do you ever use up your whole....

DAVID SHAPIRO: I don't know, I just get the bill and pay it, because I never understand the detailed billing. My wife does, she's a master at it, she's got a PhD in telecoms, she can tell you anything. You can call from anywhere in the world and she will tell you what the cost is. I haven't got the patience for that.

MONEYWEB: Well, I don't want to even see my phone bill for next month, because I was in Canada and in Switzerland.

DAVID SHAPIRO: Using your cellphone? You're dead! This is thousands, I'm telling you, you're into the thousands.

MONEYWEB: Thanks Dave, thanks, you've just made my day. I really needed it - just after finding that my house is not appreciating in value, either. So we've all got phones, and we know how we can make a better time on that side. Now we want to find out the bad news - well, we had the bad news about the water, didn't we, a little earlier? Now the bad news is that the house prices are not growing anything like the way they used to. And the expert in this field is Jacques du Toit, senior property analyst at Absa. Nice to have you in the studio again, Jacques. These are the numbers that have just come out for January. Year on year the growth is 9%, which doesn't sound too bad, but you do say in the commentary to these statistics it is the lowest rate of growth since December '99?


MONEYWEB: Dis 'n lang tyd.

JACQUES DU TOIT: Absolutely, yes.

MONEYWEB: Eight years.

JACQUES DU TOIT: More than eight years now. Yes. And I think to a large extent it was driven, especially towards the end of 2007, with the slowdown in the growth trend actually accelerating. It's to a large extent driven by the interest-rate increases in the second half of last year, as well as a factor such as the NCA coming into the property market environment. Affordability has become even more important now, and affordability has been a major issue already over the past three to four years.

MONEYWEB: Jacques, I know it's a survey of one, but I bumped into Pam Golding's estate agent for the area that I live in, and she said that she's had an absolutely record month in January, and February was going very well as well. Now could that just be Pam Golding doing well, could it just be her doing well?

JACQUES DU TOIT: Not necessarily. It also depends on the specific area that they are operating in, and the market segments that they are operating in. So across the board these are the trends that we've analysed over time, and up until January this year. But obviously in certain small pockets the trends were most probably quite different. Also, maybe on the other spectrum of the market, in certain areas the market is virtually dead, I should say. Especially in your investments maybe along the coast in certain areas - I think there is very little activity in those areas at the current moment.

MONEYWEB: So if you've invested in a coastal resort, a golf estate, something like that, it's not going to be easy for you to quickly get your money back?

JACQUES DU TOIT: No. I should say it is now time to keep your property, hold on to your property and try to sit out these more difficult times.

MONEYWEB: Are lots of houses coming onto the market?

JACQUES DU TOIT: Well, it seems like, taking into account what is being reported in the press, also from the auction guys, there are more properties on the market. But one should also take into account that not everybody is putting their properties on the market these days.

MONEYWEB: You think about a lot of the investments, or people who bought property for investment - not one, not two, I know of individuals who have bought eight or 10 properties that they have geared up with bank finance, and perhaps now, might be looking to try and reduce some of that exposure.

JACQUES DU TOIT: Absolutely, yes, but it will be quite difficult for them to get rid of their properties at a reasonable market price from their perspective. So the people out there that have got the money, that can buy property, that are cash-flush, if you want to put it that way, I should say they are not going to buy cheap properties but they will be able to pick up good buys somewhere down the line in the near future.

MONEYWEB: So it's turned into a buyer's market?

JACQUES DU TOIT: Yes, definitely, I think it's turning into a buyer's market - maybe not completely, but it is much more of a buyer's market compared to a year or two ago, when price growth was still 20%, around about there.

MONEYWEB: Jacques, I want to explore something with you that came out of Davos. Some of the economists there - Steven Roach being in the forefront - was saying that the housing bubble in the United States has well and truly burst, as we know. House prices there I think were down 7.5% last year, and expected to go even lower this year. But the economists were anticipating that UK, Ireland, Spain were the next three markets that would go, Italy also being in that category. If that were to be the case, would you see a bursting of the South African bubble, if there is one?

JACQUES DU TOIT: Well, we did not have the opinion in the past that there was or currently is a bubble in the South African market. Price growth has come down quite significantly to below 10% now, compared to well over 30% in 2004. So that was to a large extent already a self-correcting process that we've seen, and that happened long before interest rates started to increase in South Africa. Taking into account what is happening now, we expect prices to move to even lower levels, and if you look at the month-on-month growth, that is already at 0.1% in nominal terms. In real terms, we've already seen negative growth for the past four months.

MONEYWEB: So if you are holding properties as an investment, you are taking pain?

JACQUES DU TOIT: Absolutely, that is in the very short term, sure.

MONEYWEB: Is it going to get worse?

JACQUES DU TOIT: Most probably in real terms, yes, because we expect nominal growth to move to even lower levels, while there is expectation that inflation will move to even higher levels.

MONEYWEB: But let's just dwell on the nominal growth if we can. It's 0.1% in January. Multiply that by 12, that means 1.2% growth in house prices. That's along way from the interest rate...

JACQUES DU TOIT: Well, that is a quick and dirty calculation. But it is not impossible that price growth can move to much lower levels in nominal terms even, depending on what will happen in the market as a whole and also in the economy. There are certain issues and factors now coming through that can have an adverse affect on the broader economic environment in South Africa in 2009.

MONEYWEB: Have those factors, like the power, the changes in the political issues, have they played a role?

JACQUES DU TOIT: Maybe not up until this point. But, but moving forward, I think they will definitely start to play a role. And unfortunately it will more often be a negative role than a positive impact.

MONEYWEB: All right, give us some good news, Jacques. You've been Mr Gloomy here in studio. We've heard Mr Gloomy on the water side, we had a bit of gloomy business on the markets as well. Give us some good news on the house prices.

JACQUES DU TOIT: Yes, we do not expect interest rates to increase further, for them to remain flat for most of this year and start to decline, drop late this year or early next year. And 2008 is seen as the bottom in the property cycle. From 2008 onwards into 2011, 2012, upward trend in price growth, activity levels as well, based on a better-performing economy and lower interest rates during that period. But in the end the affordability issue will remain important.

MONEYWEB: I want to ask you about that, because if your average house price is R962 000, that would presume that you need a bond of, say, a million rand to buy a house nowadays. That bond would mean you would repay R11 000, R12 000 a month.

JACQUES DU TOIT: On R962 000, a 100% mortgage will set you back R12 300 a month.

MONEYWEB: That means that you have to have after-tax income presumably of R36 000, which means pre-tax income of R50 000. There are not too many people who earn R50 000 a month to buy just the average house?

JACQUES DU TOIT: Absolutely. And that is why we also feel that a lot of the focus in the market has shifted away from your larger, more expensive properties to the middle segment, and even to the more affordable segment. And, taking into account that affordability will remain important, people will most probably have to look at smaller, more affordable high-density properties in future.

MONEYWEB: Townhouses or even flats?

JACQUES DU TOIT: Absolutely. But that is where one of the problems is coming up in terms of new developments in the near future. If electricity cannot be provided or guaranteed, many new developments will probably not take place, which will have supply and demand issues focusing on the existing segment of the housing market.

MONEYWEB: It's incredible how Eskom is at the core of so much of what we do, and we've been maligning them so dreadfully over the last little while. Let's appreciate them I suppose at some point.

JACQUES DU TOIT: It is not the only factor, but it is a factor that will most probably work through to the macroeconomy and also start to affect the residential property market.

MONEYWEB: Jacques du Toit, senior property analyst at Absa. David, it's proving once again that things are complex and intertwined.

DAVID SHAPIRO: It's very interesting. Could lead to a shortage. I was going to ask Jacques the question of whether there is a supply of stock in so many houses, because we've seen so much building, and whether that will not put pressure on prices as well.

JACQUES DU TOIT: Absolutely. That is what we actually expect, in terms of existing housing, taking into account supply and demand conditions.

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