Residential Property Speculation Slump – but there’s still money to be made

Residential property speculation may be at its lowest levels in more than a decade, with only 14% of transactions in 2014 being the resale of properties which were bought within the previous two years, but there’s still money to be made if you’re smart about where you put it.

That’s according to Lew Geffen, Chairman of Lew Geffen Sotheby’s International Realty.

Of the market, Geffen says: “While properties sold within two years of being bought still sell at a premium, they make up less than half the speculation transactions of the last housing boom of 2004-2007.”

Citing a recent Lightstone report, Geffen says that during this prime period, nearly 50% of transacting properties had been bought less than four years earlier.

“At its peak in 2005, not only did we see property inflation of more than 30%, but we also found that a staggering 37% of all residential properties sold in that year had been bought within the previous two years.”

“During the sub-prime crash of 2007 this figure started declining rapidly, with owners holding onto their properties for much longer,” says Geffen, adding that about half of all properties transacted in 2014 had been bought more than eight years prior.

However, it’s not all doom and gloom for those who are keen to try their hand at “flipping” to make a tidy profit, as the recent average house price growth still remains significantly higher than properties bought more than four years ago.
Geffen says that although the national house price inflation is currently 6.66%, properties sold in 2014 that were bought within the last two years experienced substantial average annual house price inflation.

“This clearly indicates that there is still value to be gained by improving and renovating a property to sell on at an additional premium.”

“However,” Geffen cautions, “speculation does come with a fairly high level of risk which can end up costing investors a great deal of money if they’re not savvy about selecting a property that is priced below the average market value and situated in an area which will yield a decent return in the short term.”

This is where expert advice is indispensable and, with the guidance of an experienced agent with a thorough grasp of the current market trends, speculation can still be very lucrative.

According to Geffen, the following factors are crucial in successful speculative investment:

·         Timing is a key issue as it determines whether there is sufficient demand for the property from buyers to allow for a speedy sale.
·         A thorough understanding of the current market trends. You need to have a clear understanding of what buyers are looking for and, very importantly, know what the average buyer is willing to spend in a particular area. This will also help prevent over-capitalisation.
·         Location, location, location. There is no point in investing in an area that has yet to be gentrified or become popular with buyers. And factors such as proximity to good schools and amenities must also be taken into account.
·         How much money you have to spend on renovation is a key factor, bearing in mind that the higher end of the market will expect more expensive finishes.
·         The age of the property. If it’s older than 60 years, Heritage may have prohibitive stipulations.
Geffen also advises that investors ask the agent for average sale prices spanning the previous four years to date in their chosen areas.

“Recently gentrified areas such as Bokaap in the City Bowl still offer speculators worthwhile opportunities to capitalise on short term investments,” says Geffen, “and a look at average sale prices in recent years, will confirm its viability.”

Propstats figures reveal that in 2012 the average sale price across the board in Bokaap was just over R1.6m, increasing exponentially in just two years to an average of almost R2.5m in 2014. And if one looks at individual streets and areas of a suburb, one can compare apples with apples.

Jordaan Street for instance, which lies in the heart of Bokaap, saw two properties change hands in 2012 to the combined value of R1.96m while the same number of transactions in 2014 netted an average value of R2.65m. This notable growth in value coupled with the fact that there are still many unrenovated properties in the area, denote that Bokaap is still a viable area for speculating investors.

Geffen says that despite the sharp decline in speculation activity in the residential property market over the past decade, there is definitely still value in buying properties to renovate and sell at a premium if due diligence, a healthy dose of savvy and professional guidance are applied in equal measure.

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