Residential property: A 10-year bear market

One of these days I am going to sacrifice a precious Saturday of mine and attend one of those Think and Grow Rich property seminars. Or even one of the Robert Kyozaki-inspired gatherings along the same line, where mostly young and inexperienced wannabe property investors are attracted to make their fortune in the residential property market.

I need to understand why — having been an investor in property for almost three decades — I seem to have lost my touch. I am not making money in the residential property market, with the exception of a small getaway pad I purchased in the Western Cape some two years ago. What am I missing? What am I doing wrong?

My other residential properties — in good areas — have delivered little capital growth while rental growth has been negative for several years now. In fact, the rentals I am achieving today on two properties in an upmarket gated estate in the northern suburbs of Johannesburg, are less than I earned on them five years ago.

Capital values have also not moved an inch while levies, rates, taxes and upkeep have been rising at almost double the inflation rate.

I have tried selling them on and off over the past several years, but have not had even a nibble of interest. There simply are no buyers. And if you happen to find a buyer expressing some kind of interest, the answer comes back: bond application denied.

Exactly the same is happening with two other properties close by — not as upmarket — but also stuck in the same destructive wealth-destroying pattern: rentals lagging but costs soaring. And again there is not much I can do to get rid of these investments.

My experience, I sense, is more widespread than commonly reported in the media. By and large most media houses don’t spend a lot of time analysing movements in the residential property market any more, apart from the occasional piece of sunshine journalism concentrating on the handful of homes that go for astronomical prices.

I get the impression that many of these properties actually sell for substantially less than what they are marketed for, as much as 20% or less.

Why do I say that? I often make a note of some of these expensive properties that come into the market at massively inflated prices, especially in Cape Town. When I try and get a sales price from the estate agency concerned some weeks later, I am often told that the sale has been quietly withdrawn from the market.

The total number of these properties in South Africa that sell for more than R20 million are probably not more than 100 to 200 at best. That does not represent the property market where us mere mortals dwell.

True facts and figures

I need to find out how these property-promoters manage to twist the facts and figures relating to the SA residential property market in order to convince wannabe property owners to get involved in a market which, on average, has declined 23% in real terms over the last ten years. In some parts of the country, the market has started declining in nominal terms as well. More and more, I am confronted with anecdotal advice from investors in various areas of the country, especially large swathes of the countryside, where a normal functioning property market doesn’t exist anymore. For all intents and purposes, billions of rands of properties have been sterilised by this growing trend.

In my opinion, the performance of your residential investment is determined by four factors:

1.    The actual rate of increases in the nominal value of the property;

2.   The rate of growth in the rental paid (if the property is rented out) for the property;

3.   The cost of money; and

4.   The rate of increase in rates, taxes and maintenance.

A contributing factor is the availability of money (bonds) but the impact of this on property prices is hard to determine, yet it plays a significant role in either boosting property values (during boom times) and acting as a drag, such as now, when prospective buyers fail to qualify for mortgage loans.

Firstly, let’s look at what property prices have been doing on average over the last ten years. I use the research from FNB, but one finds the same results from Absa and Standard Bank.

Over the last ten years, the average residential property has declined on average by 23% in real terms.

This is despite the fact that average property prices in the Western Cape have been growing at a rate higher than inflation. By value, property sales in the Western Cape make up about 25% of the overall market, which means that average property prices in the rest of the country have declined even more, whether in real or nominal terms. I would guess that in many parts of the country average property prices are lower today in nominal terms than they were five years or so ago.

Western Cape slowing down

The rapid slowdown in prices in the Western Cape, which was already evident in the third and fourth quarter of 2017, can no longer disguise just how bad the property market in the rest of the country really is doing.

Read: Cape Town house prices slow amid water crunch

Estate agents are known to be notoriously bullish about the property market. Almost every opportunity is used as an excuse to exhort prospective buyers that “now is a great time to buy”. Most people see through that kind of marketing as opportunistic in the extreme and don’t normally fall for it any more.

But the most cynical press release I have seen in a very long time, came from the Rawson Property Group some two weeks ago or so, where Day Zero in the Western Cape is actually seen as a great time to be buying property.

The reasoning was as follows:

1. The drought will push people from the land to the cities, and hence push up demand, and;

2. The lack of water will slow down the construction of new developments and hence prices will rise.

To me it signals — and this has been confirmed by several key players in the Western Cape property market — that off-plan sales have hit a wall. A colleague of mine was only last year bragging about how many offers he had on his new townhouse in Sea Point, but when he tried to put it on the market last month, there was not a buyer in sight.

On Property24, there is an increased number of properties coming onto the market in areas such as Camps Bay, Hout Bay and Mouillie Point at reduced prices. One did not see that until very recently.

There are mainly two reasons for this (apart from the water problem). One is that prices have simply outstripped what the market can bear. When apartments were selling at anything between R70 000 to R100 000 per square metre one knew that the end was nigh… high prices are the cure for high prices.

There is a limited pool of wealthy South Africans who are able and willing to spend such outrageous prices for property. Like all markets, this seven-year bull market in the Western Cape is now pulling back dramatically.

The other main reason is that the flow of people moving down south is slowing down, perhaps even dramatically. I often speak to potential-semigrants to the Western Cape who come back after a property search, utterly disgusted with what they can get in exchange for their very large and comfortable home in Johannesburg, Pretoria or even Durban.

The disparity — apart from all the other costs — in selling up and buying in the Western Cape is simply too massive to bear for many people, despite the much-vaunted attraction of living down south.

Other factors include the traffic (now the worst in SA) and the upsurge in crime. For a long time the Western Cape did a great marketing job that living in the province somehow was more relaxed and stress-free than the rest of the country. Try and tell that to someone who has to leave Durbanville or Blouberg at 5am to get to the office at 8am.

It seems that investors and semigrants have started looking elsewhere, particularly northern KwaZulu-Natal. Latest figures seem to indicate that Umhlanga and Ballito have now become the fastest-growing areas in the country. Estates like Zimbali, Simbithi and soon Blythedale Eco Estate will be getting much more attention from property owners from Gauteng wishing to relocate.

Rental growth stuttering

If your capital values have not made any money, on average, over the last ten years, maybe you’ve benefited from rapidly rising rentals. Again, the official statistics tell a sobering story of how buy-to-let has become buy-to-regret and now buy-to-sell (at any cost).

Read: Buy-to-let has become buy-to-regret

Accurate statistics on rental growth used to be scarce and anecdotal. The website of specialist credit bureau TPN gives an accurate picture. It takes the skills of Sherlock Homes to actually find the data on rentals in SA.

The latest quarterly numbers tell the following horror story:

1. Nationally, only 67% of all tenants pay on time. A further 16% pays late or by arrangement while 5.9% simply don’t pay. That’s right, folks, almost 6% of residential tenants simply don’t pay their rent, and the poor owner has to spend tens of thousands of rands in lawyers’ fees/court cases to legally evict a non-paying tenant who in many cases is deliberately hiding behind the law not to pay his/her rent.

2. The national vacancy factor (Q3:2017) was at 5.9%, fortunately down from 8% in the second quarter. What this means is that almost 12% of all residential property is either empty or the tenant is not paying anything.

3.  The Western Cape (89% on time and in good standing) is the province with the better paying tenants while Gauteng is the worst of the big provinces with a percentage of 82%.

4. Rental growth itself has averaged about 4% per annum since 2011; peaked at 9.8% in Q4 2013 and is currently standing at 3.4% and declining rapidly. When compared to the average consumer inflation rate since 2011, average rental growth has been negative 1.45% per annum.

5. Rates and taxes nationally have been rising at about 13% pa over the last ten years, while maintenance costs, too, increase as a property gets older.

What happens when you decide to sell?

The nightmare doesn’t end. Unlike a listed instrument where you can get out at the click of a mouse, it now takes up to six months in the current market to get rid of your poorly-performing investment. According to the latest FNB Estate Agents Survey, houses in the high-net-worth band (average R2.335 million) now take 23 weeks to sell on average — that’s almost half a year! Houses in the so-called upper-income area (average R1.24 million) take 17 weeks and middle-income area (average R887 000) take 14 weeks to sell.

Ah, say the property pundits, what about gearing? The age-old chestnut when you discuss buy-to-let. A little bit of your money (deposit plus transfer fees) and a lot of money from the bank (mortgage) and you are on your way to riches. Let the tenant pay off the bond (he isn’t).

Gearing only works if the growth of the underlying investment rises faster than the cost of capital, and this has not happened in SA for almost ten years now. While some investors might still be fooled by the illusion of wealth by virtue of owning a property, the illusion has been shattered by low capital growth and the equally low rate of growth in rentals.

I recently did just that on the plot of land I purchased for R950 000 in 2007, just before the property boom came to a shuddering halt. My bond repayments, plus levies plus rates and taxes invested into a good performing unit trust would today be worth about R2 million. The property itself (any takers please!) is worth not more than R100 000 at best.

This article was researched and written before the dramatic change in political power from Jacob Zuma to Cyril Ramaphosa. A new sense of optimism and hope in the future has engulfed the country, its people and its investors. This might just be the turning point in terms of economic growth and rising asset values (which have been flat for many years) property and listed securities. We are owed a bull market in some asset classes, hopefully residential property. But then along comes the policy of “property confiscation without compensation…”.

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