If you’re thinking about buying a property in South Africa, right now may be your time to shine. The market is in a very favorable condition for first-time home buyers, and less so, for those who are looking to sell. Keep reading to find out what the current property market looks like and what you can expect.
South African homeowners have little to celebrate. House prices have dropped by 4.8% in the last decade. This may be troubling for homeowners; however, these conditions are perfect when you’re looking to buy a property in South Africa.
Rhys Dyer, OOBA, said first-time home buyers may benefit the most from the current state of the property market. House price growth has slowed during 2019, making it more affordable for first-time home buyers
We are currently in a buyer’s market, which is ideal for first-time buyers who want to seize an opportunity to enter the market. It was expected that the housing market would increase after the elections earlier this year. However, according to the FNB House Price Index (HPI) the market has been steady over the past few months, as we can see below.
FNB’s House Price Index (HPI) adjusted for inflation, compared to property value growth
Although the market is slow, the FNB HPI indicates that there has been a slight increase during 2019. Findings indicate that the nominal house prices for July were 3.3%, compared to August sitting at 3.6%, growing with 0.3% over that past few months. Although the market seems to be growing slowly, it still lags behind the 3.9% annual growth rate of 2018.
Although the market has under-performed, FNB HPI suggests that the demand-supply gap has been slowly closing. This is because there is a slight improvement in demand, while less properties are up for sale in the current market.
Supply of property in the market has been stagnant because of sellers withdrawing their properties from the market. The current market conditions are working against sellers. Homeowners are not getting the asking price for their properties. In fact, sellers are on average dropping their asking price by 9% just to strike a deal. It’s a bad day for sellers, but a beautiful sunny spring afternoon for buyers.
FNB said that that more investors will be driven to buy a property due to attractive prices, increasing competition between mortgage lenders and lower interest rates. This is reflected in the growth of mortgage extensions which averaged at 4.3% y/y for September 2019, compared to a 3.4% y/y during the same period for 2018.
Why are banks offering 100% home loans?
According to FNB, banks have been generously approving loans. Mortgage advances have grown faster than the average house price growth since the beginning of 2019. The market has not seen mortgage lending outpacing house prices since June 2011.
Bruce Swain, CEO of Leapfrog Property Group, said banks are extending the threshold of 100% loans to qualified buyers, and in some cases even 105% loans to cover the transfer costs and registration fees. The 100% approval rate from banks and a lower interest rate has seen a shift in the market, especially with new buyers.
Banks are generous in their lending, simply because they all want a slice of the pie. With the mortgage lending market estimated to be valued at R980 billion, all lenders are eager to get involved.
Swain says that the market is also seeing more affordable properties in the market. Properties in the R2.5 million regions have a higher approval rate and lower interest rates. Swain believes that the property market is in a good condition for first-time buyers or buyers who seek to extend their portfolio.
However, Absa Home Loans property analyst Jacques du Toit is concerned that if the economy doesn’t pick up momentum and if the pressure on household finances continue, consumer credit records and confidence will take a knock.
This will ultimately reflect on banks’ mortgage approval rates and lending criteria.
If you are eager to buy property in South Africa, remember that banks are just as eager as you are. Banks are handing out mortgages so that they can profit in the long run. You don’t have to take a 105% loan just because the bank is offering to pay the transfer costs.
The more you take from the banks right now, the more they take from you in the future.
Lower mortgage rates
Due to the weak economy, prime and mortgage rates are falling. During July 2019 the prime lending rate dropped from 10.25% to 10%. Market experts were keen to see the repo rate drop later in the year. But, the Reserve Bank’s decision to keep the repo rate at 6.5% and the prime lending rate at 10% left some disappointed. Especially when the current economy needs some support.
Seeff Property Group Chairman, Samual Seeff, said that there is plenty support for further rate cuts. He says that a bold rate cut would fuel economic activity as businesses and consumers will be able to borrow at a cheaper rate. A struggling economy and low political confidence have left the market worryingly low. A rate cut would help as business confidence is at its lowest in 20 years.
Re/Max CEO, Adrian Goslett, says that there is no better time to enter the market than right now. The market functions in cycles. We are currently experiencing a negative turn in house price growth.
If you do buy property in South Africa, you can buy for cheap, but you have to stick it out until the market turns again. Political factors and confidence in the market may delay the cycle from improving. The market cycle will eventually improve and yield positive growth, but no one really knows when this will happen.
And for those investors who like to follow the Buffet way of doing things, keeping your property for at least 10 years will give you much higher return on investment. Don’t simply buy a property because it’s a good time out there, think about what the area might look like in 10 to 20 years from now.
Renting in this economy
According to Global Property Guide, Johannesburg is seeing good returns on its rental yields for apartments. The average gross rental return for a property, if fully rented out, ranges from 6.5% to 9.3% for 2019. That’s a good investment.
The most desirable neighborhoods in Johannesburg are in the north of the city, including suburbs like Dunkeld, Hyde Park, Houghton, Illovo, Inanda, Melrose, Parkhurst, Parktown, Parkview, Sandhurst, Saxonwold and Westcliff. Nelson Mandela had a house in Houghton.
Cape Town is seeing a lower rental yield on apartments ranging between 5% to 8.3% for 2019. The Atlantic Seaboard properties are the most sought-after because of its beaches and cliffs, with neighbourhoods like Bakoven, Bantry Bay, Camps, Clifton, Fresnaye, Green Point and Mouille Point. City Bowl is another hotspot for buying property because of its central location and vibrant cosmopolitan lifestyle.
Forecast for 2020
FNB property economist Siphamandla Mkwanazi, has said that there has been a slight positive shift in the market during 2019. He said that house price growth could be expected to increase by 4.5% – 5% for 2020. That is if we see another interest rate drop at the end of this year.
Positive results in the market will only happen over time, particularly when supply still outperforms demand. Another rate cut at the end of the year would make a huge difference in sales volumes and improve prices for 2020.
Benefits of a deposit
Even though lenders are granting 100% loans at the moment. Putting down a deposit when you buy property will be beneficial in the long run.
It’s common practice to put down a 10% to 20% deposit on a property. The deposit shows the banks that you are a responsible saver and minimizes the risk banks are taking. This can ultimately impact the interest rate that banks will be offering you. However, if you have too much debt banks may still look the other way, because you’re seen as a high-risk client.
Leonard Kondowe, Rawson Finance National Admin Hub Manager, says that a buyer who puts down a deposit is more likely to be offered a 2.5% lower interest rate than those asking for a 100% bond. This will ultimately save you thousands of Rands on your repayments over a 20-year period.
Putting down a deposit for a property is difficult, and it takes time. But it is worth it. Take the time to invest in your future and save in the long run. If you don’t have enough savings to put down a deposit, just give it some time. There will always be property up for sale.
Remember, the more debt you have the higher your interest rates will be and there will be little chance of approval on the mortgage loan.
Contact us today if you are struggling to pay off your debt and start saving up for that dream home.
I own 10 Flats in Pietermaritzburg and some 8 years back I was making a good return on investment of around 13% + return and achieving a steady 5% to 6% escalation in rent each year which covered the yearly increase of Levies and Rates. In the last 3 years as the PMBurg economy has plunged and the poor state of the Umsunduzi run Municipality has resulted in businesses closing and others moving on resulting in some flats standing empty for as much as 3 months without a Tenant & when you do get a Tenant the Flat is rented out at last years Rate but mean while the Levies & Rates have increased eroding the quality of the financial returns
It’s unfortunate to hear that your returns aren’t doing as well as they used to. But keep in mind that your investments will always fluctuate. The best we can do in bad times is to understand where the market will be in the near future and evaluate your investment.