Residential property: Riding out the slump

http://www.financialmail.co.za/features/2015/08/06/residential-property-riding-out-the-slump

HOME owners betting on continued recovery in housing demand and prices are in for a rude awakening.
New figures from a number of experts point to a slump in housing sales in recent months — and what is worrying is that this trend is expected to accelerate in the second half of 2015.
You don’t have to look too far for reasons: a still fragile economy, scarcely moving; the decision by Reserve Bank governor Lesetja Kganyago to raise interest rates by 25 basis points; and consumer confidence at a 15-year low. All have acted as brakes on the housing market.
Throw in perennial influences that cloud investor sentiment, such as load-shedding and strikes, and the skies look rather gloomy.
Property economists have downgraded their initially optimistic assessments for house price growth for 2015.
In January, FNB’s John Loos said he expected growth of 8,8% in prices, but he has since trimmed this down to a more modest 5,3%. Similarly, Absa’s Jacques du Toit initially expected 8%, but has revised this to 6%.
For investors, this is a worrying end to a relatively favourable two years — housing prices clocked up growth of 9% in 2013 and 10% last year, according to Absa figures.
The true story of market weakness has been masked to a certain extent by some of the headline-grabbing property deals of recent months. For example, in arguably SA’s most expensive street, Clifton’s Nettleton Road on Cape Town’s Atlantic Seaboard, a luxury five-bedroom villa of nearly 1000m² under roof has apparently just been sold by Seeff to a Johannesburg businessman for a cool R100m.
A few blocks down in the same street, a 1242m² tract of vacant land that sold for R35m in 2012 recently fetched R68,3m.
In nearby Bantry Bay, a cash buyer last month forked out R42,5m for an apartment in The Bantry, while a 425m² apartment in Bonne Nouvelle in Victoria Road sold for R33m earlier this year.
A number of luxury penthouse apartments have recently changed hands in Sandton, with price tags exceeding R20m. That includes a 500m² unit at Embassy Towers behind the US embassy on Empire Place in Sandhurst for R28m.
Even real estate agents, who have been known to talk things up come rain or shine, now concede that the market is starting to take strain.
Neville Berkowitz, who founded low-commission agency HomeBid, is unequivocal: “I have been in the property market since 1973 and have seen numerous up and down cycles. Make no mistake, we are in a downswing.”
Berkowitz cites deeds office figures which show that the average number of houses sold across the country per month dropped by 6,2% in the first half of 2015 compared with the average for 2014.
The most noticeable slump is in Durban (sales down 10,7%), followed by East London (down 9,7%), Cape Town (down 9,5%), the East Rand (down 9%), Port Elizabeth (down 7,9%) and Johannesburg (down 6,1%).
Property analytics group Lightstone shows a similar drop in transaction volumes for the year.
In fact, according to Lightstone, average monthly sales have dropped to their lowest level since the market hit rock bottom in 2009 (see graph).
Ronald Ennik, principal of Gauteng-based luxury real estate group Ennik Estates, says he expects a further slide in sales volumes over the next six months.
Ennik warns that home owners who are serious about selling should avoid overpricing and should not hold out for unrealistic offers, or they run the risk of being caught in a turning market.
He has for some time been warning that the market is cooling down. But he says that in recent weeks there has been a noticeable chill in buyer interest, especially at the upper end of the market, typically priced above R7m.
“Captains of industry and other high net worth individuals are no doubt getting worried about investing large sums of money in a house when we could be heading for a downturn,” he says.
He cites the usual reasons for the turn in market sentiment: the Eskom fiasco; the ever-present threat of electricity tariff hikes; a weak rand; poor economic growth; and stubbornly high unemployment.
“These factors are prompting people to think again about the wisdom of investing in property in the near term,” he says.
There is another reason.
Government’s ham-fisted and onerous new visa regulations have pulled up the handbrake on overseas tourist arrivals. Ennik says this has dulled the appetite for SA real estate among foreign buyers.
FNB’s figures back up this argument. The bank estimates that foreign buyers (as a percentage of total buyers) declined from 5,5% in the second half of 2014 to 4% in the first half of 2015.
This is a marked reversal, considering that foreign buyers had been increasing steadily since 2010, when their contribution dropped to a post-1994 low of 2%.
Loos cites three reasons for fewer foreigners investing in local real estate.
First, he says, the reasonably “well-behaved” rand of recent times means that SA property is no longer such good value for people who buy houses in dollars, pounds and euros.
Second, residential property may have lost some of its allure in recent months across the globe. Third, the ominous warning signs about the local economy could have convinced foreign investors to wait and see what happens.