0 of 6
The old adage "safe as houses" has a somewhat hollow ring these days. Ask software engineer Craig Engelbrecht, who has had to postpone his move to the UK because he’s struggling to sell his five-bedroom abode in Bryanston. The house, built in the late 1980s on a sprawling 3,500m² stand, has been on the market for six months. The asking price of R7.2m has been dropped twice — initially to R6.5m and more recently to R5.8m. That’s 12% less than Engelbrecht paid for the property in mid-2014. But still no takers.
Elsewhere in Johannesburg, in Craighall, a super-luxury pile that fetched R21m in 2015 came back onto the market in 2016 at R19m. The house was eventually resold last year by Lew Geffen Sotheby’s International Realty, but for only R12.75m.
Cape Town-based estate agents cite similar examples of sellers battling to offload their properties, particularly at the higher end of the market where demand has cooled notably after a five-year bull run.
The Seeff Property Group reports that only two sales in the R20m-R26m range have been concluded in the year to date at the V&A Waterfront Marina — one of SA’s most exclusive residential enclaves. There were nine R20m-plus sales at the Marina last year, with prices as high as R40m. The pattern is the same in other wealthy Atlantic seaboard suburbs such as Bantry Bay, Clifton, Fresnaye and Camps Bay.
By midyear, sales in Cape Town’s upmarket R20m-plus sector had practically halved compared with the first six months of 2017, says Ian Slot, MD for Seeff Atlantic seaboard & city bowl. "That has taken about R500m in turnover out of the market."
Slot believes the drop in top-end sales is a reflection of weak investor confidence as a result of political and economic uncertainty, prompting high-net-worth locals to withdraw from the market. Wealthy South Africans are generally not compelled to buy property and tend to take their money offshore, instead, when consumer and business sentiment take a dive.
It appears that foreigners have also beaten a hasty retreat, no doubt spurred by the government’s plans to amend the constitution to allow for land expropriation without compensation.
"Sales to foreign buyers have dropped by about 40% over the past two years and are sitting at around half of what they were compared with 2014," says Slot.
There has been a simultaneous rise in the number of foreign home-owners putting their Cape Town properties up for sale.
Apart from a depressed economy and the land expropriation issue, Slot also blames the drop in sales on Cape Town’s water crisis and the DA’s poor handling of the proposed sacking of mayor Patricia de Lille. A decline in tourism and semigration has put a further brake on demand, he believes.
It also has to be said that a correction in Cape Town’s residential property market was probably overdue given the boom experienced by the Mother City in recent years, with house prices in many suburbs virtually doubling in the five years to the end of 2017.
Cape Town’s housing market has outperformed the rest of SA to such an extent in recent years that the average Cape Town house price now is thought to be at least 50% higher than in Johannesburg, Durban and Pretoria. "The Cape property market has come off a very high base with very high price growth and it was inevitable that it would need to cool down," says Slot.
But it’s not only sales of big-ticket properties in fancy neighbourhoods in Cape Town and Johannesburg that are under pressure. The Seeff group estimates an overall decline in national housing sales of between 20% and 40% from the recent highs recorded during the mini-rally of 2014-2016. Back then, SA’s housing market staged a recovery following the global financial crisis and subsequent housing recession in 2009-2011.
Yael Geffen, CEO of Lew Geffen Sotheby’s International Realty, says the company’s total turnover and sales volumes for the six months ending August are about 20% to 33% lower than the same period last year.
"The ongoing political turmoil and resultant uncertainties continue to suppress the market. The ‘Ramaphoria’ experienced at the beginning of the year has become ‘Ramapausia’ and the revelations of the commission investigating a decade of state capture are not doing much to restore investor confidence."
She notes that the average time properties spend on the market has increased significantly in most areas. Though FNB figures show it now takes just more than four months on average to sell a house, Geffen says in Johannesburg and Cape Town properties that would have sold within four weeks in 2014 can in some cases take six months to move. On Durban’s north coast the market is more active, with homes generally selling within three months. However, even in KwaZulu-Natal the market performance has become increasingly divergent, depending largely on the type of property and price point.
Geffen refers to the group’s Ballito office, which recently listed two properties in the same area, one in an estate and the other free-standing. While the house in the estate sold within weeks for close to the asking price, the freestanding house is still on the market six months later — despite the price having dropped from R3.3m to R2.1m. The reality, says Geffen, is that most people who bought a house in the past five years will see a loss if they are forced to sell.
Yet despite tougher trading conditions, it seems many sellers are not yet prepared to adjust asking prices downwards.
Andrew Golding, CEO of the Pam Golding Property Group, says some sellers still have unrealistic price expectations that are not aligned with the current subdued market. He stresses that listing price and marketing strategy are of critical importance.
"The seller has one opportunity to correctly list and position the property. An ill-advised strategy will cost the seller time and money as the property will remain on the market for longer and achieve a much lower price after the market has rejected the initial listing price."
Golding says sellers have to recognise that prospective buyers have become far more value-conscious and are resisting prices that don’t appear to be market related.
"Buyer sentiment has been negatively affected by several consecutive years of subdued economic growth," he says.
"More recently, VAT increases as well as petrol, electricity and water price hikes have hit already weakened household finances quite hard."
Industry players say the lower end of the market — typically first-time buyers in the R500,000 to R1.5m range — has been most affected by affordability constraints. Latest data from FNB confirms that ever-rising living costs and the continued erosion of disposable income has squeezed thousands of first-time buyers out of the market.
Nationally, only 18.3% of total housing went to first-time buyers in the third quarter of this year, down from a peak of an estimated 28% in early 2014. In pricey Cape Town, first-time buyers currently represent less than half of the national average.
"First-time homebuyers have battled to enter Cape Town’s housing market in recent years, with the estimated level of first-time buying in the metro dropping to a low 8.57% of total sales, a reflection of very poor home affordability," says FNB property strategist John Loos.
But first-time buyers are not kept out of the market solely by rising house prices. Mortgage lenders’ hefty cash-deposit requirements and transaction costs also play a role. While repeat buyers tend to finance one-off upfront costs out of the profits on re-sales (provided they’ve built up sufficient equity in their existing properties), first-time buyers have to find the cash elsewhere.
Latest figures from mortgage originator ooba show that in the second quarter banks required first-time homebuyers to put down an average cash deposit of 12.3%. That equates to R115,378 on a house of R939,936 (ooba’s average entry-level price).
So it comes as little surprise that the average age of ooba’s first-time home loan applicant is now at a relatively high 34.
Apart from a cash deposit, first-time buyers also have to stump up transaction costs. For a house priced at R1m, the transaction costs will add up as follows, says Vera Nagtegaal, executive head of Hippo.co.za, a financial services comparison website: R27,760 for transfer duties; R25,607 bond registration fees (on an R800,000 mortgage) and R5,985 bond initiation fees. With the deposit that means the average first-time buyer needs about R175,000 in cash.
Then there is also the monthly repayment, which amounts to about R7,720 on an R800,000 home loan at a 10% interest rate (current prime) financed over 20 years. That means the average first-time buyer (and his/her spouse) need to earn a combined gross monthly income of at least R24,000 to afford an entry-level home.
Nagtegaal says homeownership has been placed further out of the reach of lower-and middle-income earners by steep increases in municipal rates and utility costs in recent years. She notes that the cost of electricity alone has escalated by 87% since the beginning of 2008. "The weak economy and resultant slower pace at which young people are entering the job market are other reasons why only 12.4% of all SA homeowners are now under the age of 30," she says.
The slump in house sales has seemingly not yet translated into falling national house prices — at least not in nominal terms. However, the house-price indices of the banks and of data analytics group Lightstone have dropped to the low single digits, which translates into a real (after-inflation) decline.
According to Lightstone average house-price growth is now at 3.8%, down from 4.7% for 2017. FNB’s data paints a similar picture, with average house-price growth slowing to 3.7% in the first nine months of 2018 (year on year). That’s down from 4.2% in 2017 and less than half the 8.1% peak recorded by FNB during 2014.
Loos expects price growth for 2018 as a whole to remain at about 3%-4%, which should translate into a real decline of about -1%. He says 2018 will be the fourth consecutive year of slowing nominal house price growth and the third consecutive year of real price decline.
Loos describes the current slowdown as a "second post-bubble house-price correction phase". That follows a far more severe first correction phase in 2008/2009 in the aftermath of the global financial crisis, when prices dropped by about 10% in nominal terms and sales volumes more than halved from the boom of 2004-2007.
The adage of ‘never going wrong if you buy property’ has taken a hit — but experts say this might be the time to snap up bargains
— What it means
Homeowners should brace themselves for a further steady decline in real house prices next year, given the likelihood of a still-stagnant economy and rising interest rates. In fact, Loos believes house prices are unlikely to recover in real terms until SA’s economic growth rate gets closer to 3% (from 1.7% in 2017). Given SA’s unexpected entry into a technical recession in the second quarter, it is anyone’s guess if and when that will happen. Meanwhile, Loos is sticking to a forecast of nominal house-price growth of no more than 3.7% a year until 2020.
A continued weak housing market is not only bad news for homeowners who may have to realise a loss on the value of their bricks and mortar investment if forced to sell. It will also be felt by the fiscus in the form of lower revenues from property transaction costs. Latest figures from the National Treasury show that transfer duty revenues have already been in decline since mid-2017 with a year-on-year drop of 6.79% recorded in the three months to August this year.
But industry players say it’s not all doom and gloom as any downcycle presents buying opportunities for savvy investors.
Seeff chair Samuel Seeff says notwithstanding the country’s economic and political challenges, there are many positives for the property market. He refers to the prime interest rate of 10%, which is still way below levels compared with other periods of economic decline such as the 1990s, when interest rates surged to 25%. "And the banks are still granting more bonds," he adds. "At the same time, there are many motivated sellers so it is a great time to buy and you don’t want to leave it too late."
Golding echoes the sentiment, saying his group has noticed an uptick in activity in traditionally less popular areas such as the KwaZulu-Natal south coast, Port Elizabeth and smaller towns along the Eastern Cape coast, as well as the whale coast and Garden Route, the East Rand and Cape Town’s northern suburbs.
He says the market is undergoing a period of change in which the upper end of the Western Cape will no longer be the primary driver of housing activity. "It is now the turn of the more affordable, less popular towns and suburbs to recover."
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.