Real price declines make home buying affordable

OFFICIALLY in its first recession now since 1992, SA became another formal casualty of the global credit crunch two weeks ago.

However, with consumer confidence in the US having improved measurably in recent weeks, South Africans can realistically hope now that the worst of the recession will also be behind them by the end of the year.

Expectations are growing that the US will reach the end of its depression in the third quarter of the year, after Absa reported that the country had experienced its biggest monthly gain in its expectations index since April 2003. According to Absa, the increase in this particular index often signals the end of a recessionary period, which gives the rest of the world hope.

In the meanwhile, with South African house prices showing a first quarter, year-on- year decline for the first time since late 1986, according to Absa’s Housing Review for the second quarter of the year, I see a window of opportunity for buyers chasing bargains.

Absa expects there to be further real price declines this year, which will make home buying more affordable than it has been since the boom years of 2004 and 2005. For all that property values are dropping at the moment, home ownership remains a key source of security and wealth creation. Regardless of its present state, real estate is cyclical and the market will recover once the economy starts firming.

However, the key to new home ownership happiness in the present economy is financial restraint. The overnight real estate gains of the past are over. Capital growth is still to be made but in accordance with the traditional, pre-boom trend of between three and five years. This means that buyers’ modus operandi should now be focused around long-term ownership.

Before setting out on a home-finding mission, prospective buyers should work out their debt-to-income ratio and establish exactly what their cash flow is so that they know what they can afford in terms of monthly bond repayments to limit potential pain. There is not too much scope for the Reserve Bank to cut rates further so affordability will need to be established without any rate cut projections.

With regard to the banks’ reluctance to grant loans without buyers putting down significant deposits and paying their own costs, he says it’s back to the “old” days, like it or not. After years of easy access to hundred percent-plus home loans, we as a nation have lost the discipline of saving. Yet, in an environment where banks are exercising extreme caution and conservatism in the wake of mass global over-spending, we need to accept that saving is a necessary counter-measure to curbing runaway credit.

As a result, hopeful first- time buyers now have to plan well ahead to make their dreams of home ownership a reality. This not only includes working out a savings plan but also how much home they can afford. Those with limited budgets will have to stop holding out for their dream first homes and buy what they can afford if they are serious about getting a foothold in the market and starting to build real estate equity.

Those currently in the market will make their profits out of their properties when they buy, not when they sell. It’s therefore a good idea to spend a bit of time upfront getting to know the market and what’s for sale in the area in which you want to buy. Pay careful attention to the properties that have spent a long time on the market because the longer a home has been on the market, the more likely you are to get it for a fair, if not bargain, price.

Aim to buy as cheaply as possible but at the same time, remember that there is a difference between cheap and good value. Even if you can’t find a bargain, be happy to pay a fair price knowing that you’ll achieve good capital growth in the long-term.

Finally, when the right property comes along, prospective buyers need to be able to act quickly. This not only means being pre-qualified but also being flexible on aspects such as occupation date to sweeten the deal for the seller — especially if the offer is below asking price.

Mike Bester is Realty 1 International Property Group CEO

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