Now is not the time to buy

What drives the market?

In terms of any market, the price is driven by demand and supply. Remember that demand is a function of affordability. You can want all you like, but if you can't afford or don't have the funds, then you're not seen as demand. If you're the owner of a sweet shop, all the kids outside with their noses pressed against the window is not demand. They are potential demand, but until they have cash in their pocket, nope, they're not demand. Rather, the kids inside the store with money in their pocket is demand. The belief that so many homeless people will push up demand is rubbish. What they will push up is demand for government-financed low-cost housing, and until they get out of the welfare income stream, they will not be demand for the property market.

There are three factors that make up a property transaction:

1. The desire or decision to purchase

2. The availability of credit (most houses are purchased on credit, so this is fundamental; cash buyers have a functionally negligible impact)

3. The affordability of that credit

All three have to be in place for a buyer to emerge. If any one of the three is missing, no buyer. So, looking at each factor:

Decision: Many people have been hurt as property ‘investors'. These scars will be carried for a long time. So, not going to grow.

Credit: Credit is not as easily obtainable as before, and banks are very tight with their lending criteria. Puts a damper on the demand.

Affordability: With higher costs for everything, debt repayments are less affordable. So, again, dampening the market.

As you can see all three are in a declining stage, so the chances are good that demand will reduce, and with the excess supply coming on board (with all the bad deals now selling, and foreclosures), I don't see prices going up any time soon. How long? My best guess is five to 25 years. The five years is based on the time it took to build the bubble, and the 25 years is based on the psychological scars. Those hurt by property are unlikely to go back into property. Their kids however, will. Hence I'm more inclined to view the longer term option, with, to my mind, property not being an investment for a long time.

When will property be a good investment?

So, when then?

The two main drivers of demand are your ‘newlyweds' (not previously property owners ie, purchasing without selling an existing property) and your investor. An investor is not the person who buys in the hope that the price goes up, then can sell it on. That is a speculator. The investor has an idea of rental income, debt costs (bond repayments), levies etc, and after some simple arithmetic, they can determine if the property will pay them each month. For example:

Rental Income: R1500pm
Bond: R1000pm
Levies: R300pm
Net income: R200pm

The property above is a positively-geared property in that it produces a net income (these figures are based on a flat I used to own). So without taking into account any future price, this property is immediately affordable. Thus the investor is price sensitive, in that if the price rises higher and this makes the bond repayment too high, the net result is a net deficit (the investor will have to supplement the property every month.), ie, a negatively-geared property.

The newlyweds are also price sensitive, to the extent where rental costs are approximately equal to ownership. Until such time as they find that the cost of ownership is approximately equal to that of renting, they will remain renters.

What about relocation? You sell one property to move, and buy another. There is no net demand increase in the property market.

So, your two major demand drivers (newlyweds and investors), who are both price-sensitive, are priced out of the market. Hence I don't see demand returning to anywhere near the levels of prior years, or even outpacing the supply expansion currently underway. Investors and newlyweds will both start looking to purchase property once there is parity between the cost of owning vs the cost of renting, and until that occurs, I'd stay a renter. Simply because you get a better deal.

But I'm paying off someone else's bond?

And now a response to the adage: but I'm paying of someone else's bond? Yes, you are. But if a house costs R10 000pm on a bond + R1 000pm on levies/rates and taxes, and you can live in it (by renting) for R6 000pm then the owner is effectively paying YOU R5 000pm to live in his house. Pay the R6 000, and buy gold with the balance of the R5 000pm that you were going to spend on the bond. When renting=owning, then use some or all of the gold investment as a large deposit.

What will be a fair price?

By definition, the average person/couple must be able to afford the average house. If the average house is R900 000, then the average person/couple must be able to afford about R9 300pm on bond repayments. With the introduction of the NCA (National Credit Act), that must be R9 300 of available disposable income. For that to occur, the average couple should be earning (gross) anywhere from about R17 000pm upwards. Can the average couple afford the average house? Not at R900 000 they can't. Perhaps at R600 000, which means that in real terms houses have to come down by about 30%? At the same time, couples are realising that the risk they are exposed to if their joint income just makes the grade, is that if one of them loses their job, they lose their house. The newlyweds above are not going to jump into the property market with that risk, until such time as either one of them can comfortably afford the house, or the cost of renting is approximately equivalent to the cost of ownership.

My guess is that prices will come down by 25% to 40% from their peaks. Bearing in mind that we've had about a 10-15% reduction, I'd guess that a further 20%-25% is quite feasible.

*Dean Morris is a member of the REW community. He is an IT trainer and private investor with a CFP® and Advanced PostGraduate Diploma Financial Planning (Advanced Investments)

Article by: Dean Morris -