Is it time to sell South African property?


With inflation (CPI) at 3.7% y/y in February (Stats SA) and nominal house price growth declining in February y/y, as is predicted for the first half of this year, the real value of your house was eroded for the second month in a row and by 4.4% y/y in February.

As the year progresses House Price South Africa will be tracking this trend with you. Simply sign up at the top right of this page to receive free updates as the picture emerges.

Looking back in history to the end of the 1980’s boom, real house prices fell then for 35 straight months in a row from February 1984 to December 1986.

Could this be on the cards once again for South African property?

If we consider how similar the real house price pattern is to date to the classic Jean-Paul Rodrigue bubble curve, and considering the highly uncertain and fragile economic environment we find ourselves in, it certainly looks more like a probability than a possibility.

Recently House Price South Africa has received a number of questions about whether it is now time to sell up in South Africa and move money into other investment classes, or into overseas property.

The answer to this question is a little more complex than would at first seem at face value because it depends on your personal circumstances and property objectives. According to ABSA house price data, nominal house prices actually peaked in June 2010 while real house prices had already started to fall by August 2007.

1. If you are a property flipper, making money off buying and selling property in a rising market, then the nominal growth is out the market and you should be looking to sell to minimise monthly losses where there is no reasonable hope for growth outweighing monthly cash flow losses. When interest rates start to rise it will be much harder to sell at today’s price.

2. If you are a long term property investor investing for regular rental returns, then this decision will depend entirely on the health and profile of your portfolio, and your personal ability and enthusiasm for managing property in an increasingly demanding rental environment.

3. If you are a home owner who owns a property to live in, then the timing doesn’t matter. This is simply because when your home price is higher, so is everyone else’s and vice versa. Timing the market does not apply to you, so you can relax!

4. If you are starting out and trying to build up an investment portfolio over time, so that it matures around the time you retire and provides rental income, then don’t stop buying. Mortgage loans are denominated in nominal terms and history tells us that it is unlikely that nominal prices will fall significantly. Just have a look at the nominal house price history in South Africa here. The earlier you start paying down the loan, the quicker the property will become cash-flow positive and the closer you will be to realising your cash-flow objectives. Years pass quicker than you think, don’t waste them!

5. If you are a fairly recent property investor then you may be hurting right now as expected growths have failed to materialise. If you bought most of your properties in the mid 2000’s to late 2000’s, it is likely that you are suffering from a negative cash-flow portfolio with no decent growth in sight. Depending on your personal circumstances you could try to create some breathing space by selling your worst performing properties and consolidate, then watch the trends carefully before making your next move. In the meantime focus on the fundamentals! Your salary contributions combined with tenant rent will gradually pay off the property and you will have future cash flow that will allow you some freedom from the corporate world one day.

6. If you are not a property investor but are looking for a nice home for your family to live in and are wondering whether to buy or rent, then it is important to note that you can often rent a better home to live in than buy. Remember if you want to invest in property, you don’t necessarily have to live in it yourself! Buy a sensible investment but stay in a home that makes you and your family happy and healthy. If you want to make money from property you need to buy assets that put money back in your pocket, having a big expensive family home won’t put money in your pocket every month – although you can leave it in the will, or use to trade down to a smaller retirement home plus some change!

7. If you live overseas but still have a South African property that you are holding on to, then it might make the most sense to sell. The UK and US property curves are ahead of SA. If you are living in one of these countries and need extra money to improve your home and living standards there, then you could sell up in SA and buy at the bottom of the curve in your adopted country.

At the moment South African real house prices are falling and seem to be following the Jean-Paul Rodrigue curve. Could we be facing another 30 months of real house price month on month falls as seen in the 1980’s?

House Price South Africa will be tracking the actual property price curve as it unfolds in South Africa versus various industry expert predictions. Please add your own prediction here too and join in the conversation!

About these ads
This entry was posted in Is is time to sell?. Bookmark the permalink.

19 Responses to Is it time to sell South African property?

  1. Anon says:

    Hi

    Maybe this is a stupid question but you seem to be talking about REAL house prices a hell of a lot on this blog.
    So, I understand that it’s nice to know what your REAL return is excluding inflation but this would only make sense if you were doing the same with all your other investments.
    So how many people out there get their portfolio performance reports benchmarked againts inflation? (Nobody)
    So my question is, why are you so focused on REAL house prices?

    Like

  2. Jim says:

    I focus on real house prices as i’m busy puting money away to buy my first home. As long as real house price remains zero or negative, my cash investment will allow me to put down a better downpayment when i eventually buy. My rent is currently pretty low, so I’m in a fairly good position to wait.

    Like

  3. Anon says:

    @ Jim

    I’m not sure you are understanding my question.
    What I am saying is:

    Lets say you have invested in a portfolio that is getting a return of 5%. and the REAL property return is -1%. If inflation is sitting at 8% then you are still getting a better return with property than with your portfolio.

    i.e. (Property nominal return woulf have been 9% in this example)

    Like

    • By the way Anon, not to be pedantic but another reader just pointed out the property nominal growth would be 7%, not 9% in your example :)

      Like

    • Jim says:

      Point taken. For you its a matter of convention, since all returns are conventionally shown as nominal.

      Lately i’ve been converting everything into real terms and comparing real returns, as it is a truer reflection of what is going on. Either way, I dont mind what format people represent their data, as long as they are comparing apples with apples and they indicate what format they are using.

      Like

  4. Yes your point is absolutely correct Anon. Serious students of property investing will follow real prices as well as nominal and will be able to make these comparisons in their portfolios.

    Real house prices are focussed on more heavily in the SA environment because of the history of high inflation in the country. In a consistently low inflationary environment, it would not be relevant to the same extent.

    By the way we are not dismissing nominal prices at all, and in fact the very first information on the home page is nominal house prices!

    Yes you are also right that most other investments don’t talk real terms much. But that doesn’t mean its right!

    Perhaps because everyone’s policy differs in the returns and therefore the advisor would have to calculate it per person etc etc so it never really gets discussed because it is difficult to calculate and very confusing and further may not actually look very good when it is actually calculated?

    Most people are probably not too close to their investments, and therefore rely on their financial advisor to reassure them that their retirement plans are on track. This means that they don’t even get around to discussing things like real growth and how other investments might compare to property investments in real terms?

    Like

    • CJ says:

      Why use real prices – well, if Zimbabwe houses went up 1 million percent in a year and South houses went up 3%, what was the better buy ?

      If I then tell you that in Zim inflation is 2 million percent and in SA it is 2%, then you see Zim houses halved in real terms whereas SA increased 1% in real terms – so the SA 3% house price increase was a better investment than the Zim 1 million percent investment.

      Real prices tell us what is REALLY going on. If salaries have doubled, as has bread milk and most foods, then houses should also double. The end result is that nothing has really changed.

      Like

  5. Thanks CJ, that explanation is more to the point.
    On the Zim example it would actually be great to have a look at their real house prices over time. Obviously everything should be in equivalent USD, it would be interesting to see how mass evacuation from Zim has impacted real prices?

    Also with monthly inflation hitting 79,600,000,000% in Zim in mid Nov 2008 (http://www.cato.org/zimbabwe) what did that mean for your bond – if you had one? Did anyone who had a Zimbabwe dollar based bond simply pay it off for the price of a cappucino and then charge rent in USD?

    Like

  6. “@ceesbruggemans
    Cees Bruggemans
    Cpi 3.7%, gov wage offer 4.8%, unions demand 10%+higher benefits. SARB considers ‘options’ as higher inflation looms”

    Will SA be able to avoid inflation through toughing it out and staying the course, or will scenarios like this force the SARB’s hand to push up rates? Short terms benefits mean long term pain…

    Like

  7. Anon says:

    @ CJ. I agree with you only if your portfolio ONLY exists of property and you happen to have property in multiple countries and hence a different inflation.

    But if you are a 1st time buyer and have no property (Like Jim in this post), then you can NOT look at REAL house prices and deduct that if REAL price return = 0% then nothing has happened. Something HAS happened. To cancel this out you would have needed to have invested in a portfolio that is beating inflation)

    Oh, and since we took a really simple example we did not even take into account that property is geared. So a 1st time buyer who puts down let’s say 20% deposit is making a nominal return on 100% of the property value of the house and not just the 20% deposit. ie. You are making a nominal return on the banks money and not just your own. (ofc. you do need to take the interest into account of course but this would be offset by your current rent you are paying) So you need to look at the nominal return and not just the REAL return.

    So I was just trying to illustrate that you cannot compare the returns of a normal portfolio to a property return EVEN if you removed inflation from them too to get a REAL return (unless your portfolio’s are also geared or if you were buying the property for cash).

    *Shrug* I get the whole REAL return concept and the fact that it is useful for some comparisons but I honestly think it’s less helpful than just looking at the nominal return of all your portfolio’s.

    Like

    • Jim says:

      These are the calcs i’ve been weighing up to try time my 1st purchase. I’m predicting 2years as an ideal time.

      For a R1 mil property, with a R200,000 deposit, at a nominal y/y increase of, lets say, 4% would mean that the property has increased in value by R81,600 in two years. If I just pay the interest (R6568) and levies and rates (R1500) I would have reduced my loan by R32,801 in two years.

      So if I buy the property, in two years, my R200,000 investment will increased to R314401 (R200,000+R81,600+R6568) at a monthly expense of R8068 per month.

      If I do not by the property and keep a cash investment, even at a 5.35% interest and a monthly contribution of R4000 (R8068 less rent of R2068), I’ll have R323,620.

      Which means that my cash investment is currently growing faster than if I buy a property. I’m hoping for an even lower nominal y/y property growth.

      Like

  8. Jim says:

    My full calculation allowing for everything I can think of, says that as long as nominal house price stays below 4.5%, I’m better off saving.

    Like

  9. CJ says:

    First off – the present interest rates are a 33 year low. They will only stay at this level if inflation stays low. And if inflation is low then the only way for the real price to drop the necessary 50% is for nominal houses to plunge … so say goodbye to your R81,600 capital gain and think more like a R300,000 loss.

    If we do get inflation then the depreciation might be less, but interest payments on your bond are going to be significantly higher.

    Then also factor in that any savings invested in such a situation is going to gain 10%+ interest and suddenly you see the “not buying” option becomes far more beneficial.

    Maybe waiting for the real price to bottom might be a better option – then do a similar calculation and assume that house prices will increase nominally just below inflation in the next few years, then factor in the higher bond repayments, then factor in the higher interest on cash investments … and then you can see at that time whether it will be more viable to buy or rent.

    Like

  10. Anon says:

    @ Jim

    You have made one very big mis calculation in your little 2 year plan.

    You have not taken into account what you currently pay in RENT.
    Lets say you are renting now and paying 4k per month. If you bought now you would not be paying this amount each month. (Hence you would make 4k * 24 = 96 k in savings with your 1st scenario)\

    So to Quote you:

    “So if I buy the property, in two years, my R200,000 investment will increased to R314401 (R200,000+R81,600+R6568) at a monthly expense of R8068 per month. ” + 96 k. in saved rent = R410,401.

    So the question is. What is your current rent? :) Now do your calculation.

    Like

  11. Jim says:

    @ Anon. Thanks for the suggestion, but wouldnt this be incorrectly allowing for rent twice. I have allowed for rent here;

    “If I do not by the property and keep a cash investment, even at a 5.35% interest and a monthly contribution of R4000 (R8068 less rent of R2068), I’ll have R323,620. ”

    Yes, I have a very good rent, but even if my rent was R4000, my monthly contribution would then be R4068 resuting in R325339.15 after 2 years at 5.35% interest rate. Which is still higher than R314401 at 4% nominal y/y capital gain. Which means instead of only a 20% downpayment, I can make a 30% downpayment.

    Like

  12. Jim says:

    oops, i just realised that my monthly contribution should have been R6000 on the first calc.

    Like

  13. Jim says:

    http://www.iol.co.za/news/south-africa/relief-for-defaulters-1.1053047

    Interesting if this applys to home loans., banks would have to charge an interest rate of less than 8% so that the interest payment over 20years remain less than twice the capital…..

    Like

  14. I am really impressed by the level of interest here and one should always be unemotional about an investment. this is particularly true for a real estate investment. Often where you will earn money on a property is seldom where you would want to live. I am a South African expatriate who sold and invested in South African real Estate for more than 10 years. I currently work for http://www.ipglobal-ltd.com – we specialize in creating global property portfolio’s for individuals on a global basis. Residential Real estate in urbanizing city centers with high yields, low interest rates, good currency exposure, liquidity / exit strategy, excellent capital growth. Circa 15% annualized returns to date. you own the property outright. Pleas contact me on angelo.kazantzas@ipglobal-ltd.com for more details.

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s