O-YES Properties | Best buyers market in over 35 years

Best buyers market in over 35 years

South Africa is currently under lockdown Alert Level Three - and as the deeds office deals with its backlog, the property industry overall is faced with pent-up demand after some 64 days of restrictions.

As every sector of our economy shakes under the strain caused by the Covid-19 Pandemic, the Reserve Bank has taken radical steps to ease the anticipated deep recession of between -4.5% and -8.0% Gross Domestic Product contraction, significantly more severe than the -1.5% GDP contraction of 2009.

CEO of MultINET Home Loans Shaun Rademeyer says, “We experienced a sharp slowdown in applications at the end of March and part of April 2020, however our year on year figures for May 2020 show only a 15 % reduction in volume compared to the same month in 2019. We started to see a small increase in registrations in the recent weeks as the deeds office reopened and attorneys could issue instructions.

However, the recent interest rate cuts have stimulated interest among buyers, as revealed by an increase in ‘buy a home’ search terms since the rate cut announcement, says Rademeyer.

In 2019 you would have needed to earn a household income of R28 951 to afford a R1 million home, now that has significantly been reduced to R23 711 - an estimated 20% reduction in the gross income requirement. Even though the market is under pressure, a new buyer in the market has been empowered.

As sellers are called on to be realistic in their pricing, it’s said to be the best time to buy in nearly three decades. 

Purchase Price

2019 salary required

2020 salary required

500 000

R14 475

R11 856

1 000 000

R28 951          

R23 711

 

READ: Should you fix your interest rate, now at a historic 50-year low?

Customers’ income, current debt commitments and monthly household expenses are all considered to accurately determine an applicant’s affordability, and ultimately their ability to take on additional debt.

This principle has not changed as a result of COVID-19, although it is expected that the income of some customers will be affected, which will impact their affordability, there are sectors that are seeing a boom such as online services and tech businesses resulting in a client base with the income to purchase homes.

“Banks and lenders are processing applications now that they have the ability to verify employment. We anticipate an increase in home loan applications as the Real Estate Industry resumes business," says Rademeyer. 

READ: SA’s major banks on home loan approvals as Covid-19 Lockdown levels eased

While it’s too early to comment on consumer confidence and overall sentiment around property, the number of bond applications received this month (May 2020), compared to the number of applications received in April 2020, are telling, says Carl Coetzee, BetterBond CEO. 

"April saw a 70% drop in applications from February and March, and of the deals concluded up to 60% were conditional on viewing the property before the transaction would be concluded. By mid-May though applications were approaching 70% of what they were a year ago, which is promising for the sector and the various role players in the value chain.

What’s more, this is a clear indication of renewed interest in the industry, which bodes well for the property market and the economy at large.

So if you are still wondering when the best time to buy is, this is it, says Samuel Seeff, chairperson of the Seeff Property Group.

As real estate emerges from Lockdown under Level 3 and the support structures of real estate transactions head back into operation, we also enter the best buyers’ market in my over 35 years in the industry, he says. 

Best buyers’ market in over 35 years

While it is difficult to predict how the market may play out in the coming months, Seeff says that right now, the market is especially favourable for the low to mid-market range to R1.5 million (R3 million in some areas) where we are seeing the bulk of activity. Buyers who are financially able to buy now have more property to choose from as stock levels are higher than what they have been for some time.

In many low to mid-price areas it is almost cheaper to buy than rent now, he says. Investors can also use the low interest rate to their advantage. Sellers in the low to mid-price ranges should still be able to sell faster. Additionally, says Seeff, price growth in this sector is also likely to fare better compared to the higher price bands.

'Bargains in the super luxury sector'

The upper price bands and super luxury sector above R8 million (R15 million in Cape Town) are, however, expected to remain muted and sellers will need to price competitively. This sector of the market, says Seeff, is a function of sentiment. Until sentiment and economic activity picks up and confidence in the future of the country and the economy improves, buyers will likely remain selective.

That said, the super luxury sector currently offers the best opportunity for bargain hunting in 35 years. The depreciation of the Rand means that high end property is now about 20% to 30% cheaper for those paying in Dollars, Pounds or Euros. Prices are already down by about 20% since 2018 and we expect a further decline of around 20% to 30%.

Seeff expects the rental market to be busier than usual with a great deal of movement. Many tenants will look to downgrade, and more people will move into the rental market until financial stability returns and the economy improves. While rental rates will come under pressure as a result of the economic decline, we do expect the market to bounce back quite quickly.

Chris Renecle, MD of Renprop, says the current market in many instances has led to the monthly rentals of residential property becoming more expensive than monthly bond repayments would be on the same property.

“The last time a South African property market investor could recover their bond repayment on a 100% bond with the rental income was in the 1990s.”

Renecle says that as most economists envisage that the interest rate will remain low over the next 18 months or so, it makes sense for those who have been sitting on the fence about property purchase or investment to take the leap.

'Marginal reduction in residential property values'

“From a residential property investment perspective, there has never been a better time to buy. Potential property buyers do however need to take into account that the bond repayments are only one financial aspect of a property purchase.”

According to Renecle, in terms of investment, the direct purchase of residential property will always leave the investor with a defensible asset, as it will never see the reduction in value to the same magnitude as the listed sector. 

“While there has been, and may well continue to be, a marginal reduction in residential property values, over the years the sector has always experienced growth. Added to this, there is, and will continue to be, a constant demand for residential rental properties. I don’t foresee this scenario changing much despite the economic impact of COVID-19.”

Renecle says that when it comes to weighing up the pros and cons of investing in residential property right now, the supply and demand ratio as well as inflation need to be taken into consideration. He explains that during Level 5 and Level 4 of South Africa’s Lockdown, construction came to a halt.

Many planned residential developments have also been put on hold.

“This means that over the last two months, the supply of residential property units has decreased. And while there may well be a decrease in demand for residential property units due to the current economic climate, there will be a bigger decrease in the supply of residential units than in the demand,” says Renecle. “This means that prices may well start to increase, and when this supply and demand disparity is coupled with the impact inflation will have on building costs going forward, residential property prices are set to escalate even further.”

Renecle says that in light of this, it has become clearer than ever that now is the ideal time to purchase a residential property. 

'Tangible, lower-risk asset like gold'

Demand for rental homes always increases when consumers are under financial pressure, notes Berry Everitt, CEO of the Chas Everitt International property group.

“This means that if you buy wisely in an area that is well-located and well-priced, your rental property or properties will seldom be vacant and you will have a steady stream of rent coming in to cover costs,” says Everitt.

“Other reasons to buy when the economy is in trouble include the facts that real estate is also a tangible, lower-risk asset like gold; that your acquisition costs will be lower because property prices tend to go down during recessions; and that interest rates also tend to be lower, which makes bank finance more affordable.”

'Increase of more than 50% in past 10 years'

And finally, he says, you will set yourself up for decent capital growth in the longer-term. “For example, many investors who had the courage and foresight to buy property straight after the 2007/ 09 financial crash have seen the value of those properties increase by more than 50% over the past 10 years.”

What is more, you don’t have to be super-wealthy to invest in real estate.

"There are many areas where there is high demand for cheaper rental apartments and houses among lower-income tenants and students, for example."  

“These days, with technology making it possible for many more people to work from home full-time, there is also rising demand for rental homes in country towns, where property purchase prices also tend to be much lower than in the cities.”

'Pool your resources' 

For those who don’t have the cash to buy an investment property outright, he says, there are many options for pooling their resources with others who are interested in doing so, or obtaining bank finance. “Crowdfunding is the most modern method of raising cash, but South Africans may be more familiar and comfortable with a ‘stokvel’ set up with people they know and trust, and our banks are also used to assisting these savings groups.

“Alternatively, you may wish to invest together with just a couple of friends or members of your own family, and in general SA banks are quite amenable to granting home-loans for such joint purchases, provided there is a clear agreement in place about who will be responsible for the bond repayment. This agreement will need to be drawn up by a professional, and once that is done, investors are also advised to consult a reputable mortgage originator and obtain pre-qualification for a home loan so they know exactly how much they can afford to spend.”

'Identify the property you want and start negotiating'

Next, says Everitt, you will need to decide on the type of property you wish to buy and where, go through the online listings for these areas to identify the best prospects, contact the agents involved to arrange viewings, and start negotiating price.

“You should also look out for new developments in your preferred areas, because there is also no transfer duty on units purchased directly from a developer, and because you stand to see rapid capital growth by the time an off-plan unit is actually built. In addition, newly-built units come with certain construction guarantees and generally require much less maintenance for the first five years of ownership.

“And whether you decide on a pre-owned or a new property, you should not delay buying now. Interest rates are already at the lowest levels in almost 50 years, there is plenty of good inventory to choose from at the moment, and rental demand is set to keep rising as people respond to the fallout of the Covid-19 pandemic by making changes to their lifestyles as well as their budgets.”

Article Courtesy of Property24

 

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