The way forward according to Absa and Fine & Country

At a recent Fine & Country property development launch, Senior Absa Property Analyst Du Toit said the dramatic decrease in employment and production of the past year had a proportionally negative affect on South Africa's household sector.

However, the worst appears to be over and an upswing is now beginning to manifest across the board with "these variables moving into positive territory of late."

Inflation (specifically food price inflation) has remained relatively stable in the wake of interest rate cuts and a strong rand exchange rate. At the time of going to print, the inflation rate stood at less than 6% he added.

Moreover, he said in terms of the short to medium term outlook, the FIFA World Cup bodes well from an employment and investment perspective. However, the proposed electricity rate hikes (due to come into effect towards the end of 2010) and fuel price increases (such as the 50c per litre increase which occurred in April) will, in all likelihood, have a negative effect on food prices and transport costs.

Against this background, there has been a slight increase in real house price growth to 0, 7%, driven by demand as the broader economic environment improves.

"Growth levels are not and probably will not easily reach the levels which occurred (in the property market) in 2004 and 2005. During that period, growth increased by an unsustainable 35% catalysed by a slew of interest rate cuts in 2003"

Growth tapered off dramatically at the beginning of 2008 as did the number of mortgages which were granted. This scenario began to level out towards the end of 2009. In essence the property market corrected itself "happily" without the intervention of monetary authorities.

A fairly promising outlook aside, du Toit and Erasmus advocate caution going forward.

Du Toit explains: "The slew of interest rate cuts which came into effect in recent times fuelled the demand for credit. Western economies are typically driven by credit. As such, the availability of credit is critical. However, credit comes at a price and low interest rates may cause potential property purchasers (and owners) to overextend themselves once more which is what occurred in 2004 and 2005 to a large extent.

"The expectation is that interest rates will remain relatively low over the short to medium term. However, rates will in all likelihood increase again towards early 2011 and many may suddenly find themselves unable to honour their debt, which could spell trouble for a household sector which has to deal with relatively high levels of debt."

The strict lending criteria of banks should negate such instances to a large extent though Erasmus pointed out.

"Although the protocols may seem overly restrictive, they have been introduced with a view to cultivating responsible lending and borrowing. As it so happens, the banks are softening their lending criteria slightly as the eye of the global economic storm moves on. That said, the decision to lend money still largely depends on the risk profile of the customer."

According to du Toit, South Africa's banking structures and protocols were recently rated 6th in the world. Switzerland ranked 44th.

The property investment horizon

Ideally, a person's property investment horizon should span five years, depending on market conditions, says du Toit. The purpose and type of property play a pivotal role in this regard.

The purpose of the property can be classified under residential/ primary use, leisure, speculative, buy-to-let, rental, long and short term.

Types of property include vacant land, residential, commercial, industrial, retail, local and international, inland, coastal, rural and urban he added.

No matter the type and purpose of the property, the age-old adage of ‘location, location, location' still plays a key role said Erasmus.

Du Toit elaborated on the topic saying multiple property owners need to take into consideration factors such as diversification and management.

"Diversification spreads the risk and management helps direct the portfolio in a profitable manner."

These aspects aside, all property players have to take into account the affordability factor.

"Will you be able to afford the property if the interest rate goes up? Rates and taxes, electricity, water and maintenance costs also have to be factored in."

Circumstances change for better and for worse he adds. "The trick is to remember that property owners don't have to stay at, or own a particular property forever. For instance, if a person's financial situation improves, they can move up the property ladder and rent out their original property."

Erasmus concurs with this premise: "The nature of the property market is cyclical. It has its ups and downs. Akin to the stock markets, a good rule of thumb is to sell at the top and buy at the bottom. For instance, now would be a great time to buy as bargain properties are still available to a large extent."

In demand

According to Erasmus and du Toit, demand is most prominent in the middle income bracket. Two and three bedroom flats and townhouses priced between R500 000 and R900 000 are proving the most popular with this segment.

The top end of the property market has remained relatively unaffected. Luxury, coastal homes are popular with these buyers.

Those looking to invest at this level would do well to purchase vacant coastal plots near city hubs says du Toit as they are becoming somewhat scarce and will only increase in value.

Overall, Erasmus and du Toit agree that everything considered, things are beginning to look up but that caution should be practiced by all going forward.

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