Market dynamics that influence home sales

It is often said that purchasing a property is possibly the largest financial decision any consumer can make, considering the impact that the decision can have on one’s financial well-being both now and in the future, says Adrian Goslett, CEO of RE/MAX of Southern Africa.

“For many consumers their property is the biggest asset that they own and a substantial portion of their personal wealth. This dynamic is true for consumers both locally and abroad. According to statistics, the average citizen in the United States has approximately one third of their net worth tied up in real estate. While not all South African’s own a property, most aspire to homeownership and see it as a measure of success. A large number of South African consumers value property ownership over most other forms of investments, and view it as the cornerstone of wealth creation,” says Goslett.

With this in mind, Goslett notes that understanding the market dynamics that influence property transactions is an integral part of property investment for both those wanting to buy property as well as those wanting to sell their homes.  He explains that knowing what dynamics affect property buying behavior and how, will give an indication of where the market will be headed in the future and how consumers will need to adapt.  While a large number of factors that impact the market are internal such as a buyer’s personality, knowledge of the market and lifestyle requirements, there are other external factors that will change the dynamic of the market as well.
Goslett explores some of the external factors that will have an influence on the property market:

Interest rate

An unexpected rate cut last year brought the prime lending rate down to 8.5% - an interest rate figure that was last seen over 38 years ago. Goslett says that this current rate has made property investment a very attractive option for many who have access to finance, whereas an increase in the interest rate will most likely negatively affect a potential homebuyer’s ability to purchase property, as higher monthly repayments will impact on their affordability ratios. However it is anticipated that the interest rate will remain between 8.5% and 9.5% for at least the next 12 months.

Access to finance

The introduction of more stringent lending criteria by financial institutions has changed the face of the property market completely. Consumers wanting to purchase a home will need to have disposable income and positive affordability ratios to be considered for home loan approval.  According to the South African credit legislation that governs the practise of mortgage lending, a financial institution may not grant a bond if the monthly repayments are more than one-third of the applicant’s monthly net income. For many consumers a deposit is also required. While it is possible to get a 100% home loan in certain circumstances, the standard requirement is for the applicant to have a minimum of a 10% deposit of the asking price of the home, and in certain cases a deposit of up to 30% may be mandatory.  

Area demographics

According to Goslett, an area’s demographic can affect the property sales in that area. The composition of the population in that region such as the age, gender and average income of the residents will impact on the volume of sales transactions in that area. These factors can be a major factor in how the real estate in the area is priced and what type of properties are in demand. For example younger buyers will generally purchase sectional title units because of their lock-up-and-go features and affordable pricing.

He notes that a shift in an area’s demographic makeup can change trends seen in that particular market environment. Goslett says that from an investment perspective, changes in buyer profile could negatively affect the return on an investment if it impacts on the demand for property in that area. “It is important to choose to buy property in an area that will appeal to tenants and other investors for many years to come. Location remains a major element in deciding which property to purchase, especially if the goal is to see the investment grow from strength to strength,” says Goslett.

The economy

If the general economic health of the country is not performing well, neither will the housing market. Goslett says that poor economic performance will negatively impact that number of properties transactions due to that fact that a poor economy will lead to greater unemployment levels, which in turn means less consumers will be able to purchase property.  This was evident during 2008 when the global economic crisis hit South African shores and property sales dropped dramatically. Up until that point, economic growth was on a steady upward trend with 62 quarters of uninterrupted growth from the first quarter of 1993 up to the second quarter of 2008. Currently the general economy has shown vast improvement since the global financial crisis and property sales are once again on an upward trend. Goslett points out that during 2012, RE/MAX offices across all regions of the country showed an overall increase of 11% in house sales compared to the sales seen in 2011.

The law

Government legislation can have a remarkable impact on the dynamic of the property market. The introduction the Consumer Protection Act (CPA) changed the way property transactions were handled and concluded. Transfer duties have also dropped considerably over the last couple of years, as has Capital Gains Taxation levels, which both impacted on the affordability of the buying and selling of property.

Goslett concludes by saying that having a thorough understanding of the property market and the various factors that influence it, on both a macro and a micro level, will allow property investors to comprehensively evaluate the potential of their property purchasing endeavors. Having an insight into the key driving forces behind the property market will fully prepare investors to make an informed decision.

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