Fundamentals growing favourably for home buyers

Auction Alliance's third quarter analysis of housing market conditions in the country's three largest metropolitan areas found that home values declined in all markets, whilst residential rentals had risen across the country.

Interest rates, which are hovering at around 9%, are at their lowest levels in three decades, and as a result, monthly bond payments on median-priced homes are becoming lower than the average rent levels in many middle income areas.

"It does remain less expensive to rent than to buy in most popular suburbs, but we are reaching the stage that if a buyer has a 10% deposit, it is cheaper to buy than rent on properties under R750,000".

However, affordability hasn't done much to lift the sagging housing sector because many would-be buyers are unwilling to purchase a home or are unable to qualify for a bond.

"It's one of the most striking developments of the housing downturn. The initial building blocks for a recovery are in place, but the legacy of the recession is acutely preventing households from taking advantage", Levitt adds.

On Johannesburg's East Rand, which had the most favourable values for owning versus renting, the monthly payment on the average home was R1,800 assuming a 20% down payment during the third quarter. By contrast, the average asking rent stood at R2,000, according to Auction Alliance.

However, real estate agents and economists assert that the trend hasn't boosted demand, because affordability alone hasn't been enough to overcome the obstacles impeding the housing recovery.

Some homeowners who would like to move up to larger properties are stuck because they can't sell their homes. Also, whilst the monthly carrying costs on a bond are lower than average rents in several suburbs, home ownership carries other costs which are increasing, a factor which may dissuade some potential owners.

Other would-be buyers can't qualify for mortgage bonds because lending conditions are tighter or because they don't have enough equity in their current homes to use as a deposit.

"The reality of coming up with a deposit and the loan-qualification standards, makes things difficult for many new home owners. Even those who may qualify remain skittish about buying property in a market where prices could fall amid growing financial distress and weak employment growth."

Another reason why home ownership is also looking more affordable is, after several years of house price declines, rentals are growing as demand from entry level tenants increases in an under-housed SA. Suburbs where owning is now cheaper than renting include Kraaifontein, Kempton Park and Vereeniging, as well as the Johannesburg and Pretoria CBD's.

Even cities where it is still cheaper to rent than own have seen big boosts in property affordability. Due to a weak residential market and high building costs, the inventory of brand new homes on the market has fallen from levels seen three years ago, as prices and interest rates continue to decline.

In Cape Town, the monthly cost of owning a home has averaged around 83% more than renting over the past two decades. During the third quarter of this year, owning was 22% more expensive than renting according to Levitt.

In 1997, a R3,000 mortgage bond payment allowed a borrower to take out a R200,000 mortgage. Today, it gets that home owner a R350,000 loan, a 77% increase in borrowing power, says Levitt. At the same time, low mortgage rates aren't spurring sales because few analysts expect rates to rise imminently.

The Reserve Bank recently indicated that it would keep rates at low levels for the short term future. In a normal interest rate cycle, "when they go low, they don't stay for very long, and people jump in. However, this time there is no urgency".

According to property economist Erwin Rode, the interest on a mortgage bond was about 20% in 1997, and by 2011, this had halved to 10%. Rode argues that at first glance this would have increased the borrower's "borrowing power" tremendously.

However, he contends that with regard to new purchases, this is not true, because the dramatic drop in interest rates was partially responsible for the even more spectacular rise in house prices.

A typical house, according to the Absa House Price Index, rose in value from about R200,000 in 1997 to about R1,1 million in 2011 (12.8% per annum).

As a result, the instalment on a new purchase (assuming a 100% loan) increased from R3,400 in 1997, to about R10,600 per month in 2011. In sum, over this period, instalments on new purchases grew at a compound rate of 8.5% per annum, compared with an inflation rate (CPI) of only 5.8%.

Rode argues that the difference of 2.7% points is more or less equal to the posited rise in real incomes, which means that house owners do not necessarily find it more difficult to own a house now than 14 years ago.

Levitt maintains that affordability could continue to improve as prices slide even lower in coming months.

"Further price declines are likely because the share of distressed sales tend to rise in the new year. Banks are often more eager to cut prices in an effort to unload properties quickly, which means that the greater the share of distressed sales, the more prices tend to fall."

Lower inventories at the bottom end of the market have spurred more bidding wars at recent auctions as investors compete for homes that they can convert into rentals. One hopeful sign is that houses on the market have fallen from their bloated levels of a year ago.

"A glance at the property pages sees homes currently listed for sale at prices substantially lower than a year ago, when markets were reeling with a substantial overhang of properties amid a big drop in demand, and visible inventory was down sharply in several markets," says Levitt.

  Comment on this Article

  Please login to post comments

Post to my facebook wall
Characters remaining

    Latest Property News
    • 18 Jan 2018
      New year, new goals! If you’ve resolved to purchase your first property in 2018, then this 6-step guide from the Rawson Property Group is a must-read. It will help you navigate and simplify what is often be seen as a confusing process of buying your first home – right from the house-hunt to the house-warming.
    • 17 Jan 2018
      While the current property market may still favour buyers, it doesn’t mean that they shouldn’t be well prepared before putting in an offer to purchase.
    • 17 Jan 2018
      Lightstone lists Blair Atholl as the most expensive suburb with an average house price of R11.2 million, followed by Westcliff (R10.5 million), Dunkeld (R9.3 million), Sandhurst (R9.1 million) and Inanda (R7.2 million).
    • 17 Jan 2018
      As it currently stands, there are four main ways in which a home can be bought in South Africa, says Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa, who adds that deciding in which legal entity to purchase the property is not a decision that should be entered into lightly, as each has its pros and cons.
    • 16 Jan 2018
      The start of the new year is symbolic of new beginnings. A good time to take stock of one’s possessions as well as how necessary they actually are. However, seeing as the process may appear daunting – a plan goes a long way.
    • 16 Jan 2018
      The Western Cape is still in the throes of a severe drought and many households have to adjust the way they use and save water. It is a little more complicated in sectional title schemes, however, as it is not that easy to implement grey water systems for multiple users and it is also difficult to monitor water usage accurately if there are no separate water meters
    • 15 Jan 2018
      In ideal rental situations, when a lease is signed the tenant will stay for the full duration of his lease without any complications and the landlord will uphold his obligations, creating a win-win situation for tenant and landlord.
    • 15 Jan 2018
      The Atlantic Seaboard’s housing market has stoically withstood the brunt of the growing economic and political instability, consistently achieving double digit growth way above the national average, however, in 2017 South Africa’s most resilient market finally began to yield to the pressure.
    Subscribe to the MyProperty Newsletter

    Last Name  
    Email Address  
    Email Frequency
    Share this Page

    For Sale Property
    Rental Property
    More Options
    Connect with us