South African property market and economic review

Dawie Verryne, CEO, Korbitec

With the South African economy slowly starting to recover from the impact of the recession, the country’s property market continues to demonstrate signs of positive growth.

Dawie Verryne, CEO, Korbitec says lowered interest rates have helped South Africans to gradually start absorbing their debt, slowly alleviating financial pressure for prospective buyers.

Yet whilst this has contributed to a small upswing in terms of sales figures and property prices, the industry remains a shadow of what it once was, with transaction levels having effectively been halved since the market’s heyday in 2005/2006.

Increased Buyer Interest

Although actual sales figures continue to crawl steadily upwards, consumer interest in property has skyrocketed over the past few years, largely as a result of easy access to information, courtesy of the country’s many online property portals.

Spurred by the recession, the property industry has effectively relocated itself to the online sphere, with traditional above-the-line advertising having been reduced dramatically due to spiralling costs and tightening budgets.

Interest from South Africa’s growing online community has been enormous, with many property portals having doubled their audience figures in the past year.

However, even with buyer interest at an all-time high, the industry remains throttled by the increased cost of credit, and stringent lending criteria imposed by the country’s banking institutions.

Access to Credit

Despite the banking sector having demonstrated an increasing willingness to issue home loans in the past 12 months, prospective homeowners are still battling to access affordable credit. Lending rates of prime -1 and -2, relatively easy to acquire during the market’s boom period, are practically unheard of in the post-recession climate, with banks having been forced to alter the price of credit in order to return to profitability and comply with strict Capital Holding criteria and cost.

Increased levels of fraud have also resulted in banks’ growing caution when issuing loans, with would-be buyers now being forced to provide reams of supporting documentation and undergo comprehensive fraud checks before being able to access a loan.

So whilst the increased appetite of the country’s banks to extend debt into the market marks a positive development for the long-term growth of the property industry, credit remains difficult to access, keeping the market’s recovery slow.

Buyer’s Market

With only a small percentage of would-be buyers able to access to capital, the country continues to see an oversupply of property. As a result, buyers with access to cash or credit are likely to be able to find bargains, which could result in significant profit over the long term.

There is no doubt that buyers are in the strongest position at this time, however, the prospects for sellers aren’t as bad as they might seem. The key to a successful sale lies in realistic pricing, something which many sellers fail to realise.

Buying to Let

South Africa’s buy-to-let market continues to see little growth, with the increased price of credit, as well as rates and taxes, making it increasingly difficult to use this as an effective channel through which to pay off a bond.

Whilst rental prices have also begun to steadily climb upwards, prospective buyers looking to lease their properties would likely still have to wait a number of years before being able to break even.

That having been said, profitability is largely dependent on purchase price, and with bargains and distressed properties more widely available these days, there are instances in which rental income could effectively cover monthly bond repayments in a short period.

Red Flags

The last 18 months have seen a constant increase in transactional volume, with these incremental improvements indicative of a market returning to health.

Yet the last quarter has seen a slowing in the market’s growth rate, with investor confidence having been shaken somewhat by developments both locally and abroad.

Europe’s debt crisis continues to remain a factor affecting purchase decisions, while the current unrest closer to home, which has seen the Rand plummet against the world’s major currencies, has caused a slight souring in investor sentiment.

Sweating It Out

Despite these recent events having made a slight dent in the property market’s steady recovery, prospects remain largely positive. And whilst political unrest or an economic downturn certainly have the potential to reverse current trends, the likelihood of a fairly imminent recovery is good, said Mr Verryne.

With interest rates at an all-time low, and buyer interest mirroring banks’ increased lending appetites, the next few years should see the market slowly returning to pre-recession levels.