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Wednesday, August 1, 2007
Homespun advice

Homeowners are getting jittery; they want to know if the time is right to jump out of property into other investment opportunities. The short answer is a yes – and no.

Says Gavin Opperman, Managing Executive of Absa Home Loans, “A house is usually the biggest financial commitment people ever make. So when the market slows down it is not surprising they think about re-jigging their investment portfolio.
“When you consider how much some properties have soared in value there is a very good – and tempting - case to be made for selling the home and realising the capital growth you’ve made.”
The latest economic indicators show that nominal house price growth will probably average 13,1% in 2007 (compared to 15,3% last year); or 7,2% or 10,2% in real terms. Despite continuing demand in the property market, inflationary pressures are beginning to put the breaks on.
South African homeowners are expecting to make easy profits in a short period, but now they might have to review their expectations. In one sense it could be a good time to sell. But while they may realise some of the cash they would still need to find a home and would likely have to scale down.
However, Mr Opperman observes that the South African property market is more volatile than in developed countries, such as Britain or America. This means that while price growth may be slower this year, it could rebound quickly. People out of the property market, or who have traded down may lose out.
On the other hand, the Reserve Bank has become obsessive about ‘controlling’ inflation through manipulating interest rates that its resolve may well mean still higher rates. This would obviously impact further on the housing market, not only subduing growth, but depressing sentiment. In turn, property owners, especially those with lease investments could well start cashing in, and this might depress market prices.
“Other issues need to be factored into the equation,” observes Mr Opperman. “On the positive side, household incomes continue to grow, which puts more money in the hands of people who want to purchase properties.”
The economy is still delivering satisfactory growth, but there has been a worrying decline in business confidence. There has also been a rapid escalation in building costs; there are unacceptably high levels of household debt; and, there are the unresolved problems with unlocking sufficient appropriate land for residential development.
“None of the above means that the focus of investors has, nor should move off residential property as an investment option,” he says. “Despite a perception that the housing market is subdued, growth in value remains robust and demand high in some categories.” For example, in the lower end of the market, which dominates volumes in both numbers of properties sold and home loans secured, price growth has remained firm at over 18%, as at April, year-on-year. In the luxury segment, however, the trend has softened to around 6%.
Recent reports in the media have suggested that the average house price will top R1-million in the next year or so. On paper, that would seem to put ownership well out of the reach of most South Africans and certainly first-time buyers. According to loan criteria combined household income would need to be at least R30 000 a month to afford the bond.
However, these statistics don’t tell the full picture because South Africa is experiencing such social currents that many new property buyers from previously excluded groups are boosting demand in a market that is struggling to cope.
While it is true the cost of a two or three bedroomed home is averaging over R900 000, one can get into the market through acquiring smaller properties such as bachelor flats or one-bedroom apartments And it is still the case that the sooner you get into the property market, the better. Getting a foot in the door, so to speak, is the most important move. No matter what sort of property you end up with it is far better than staying out in the cold. Even on that first rung you will begin benefiting from the long term increase in property values. — and indeed it will be a stepping stone to your next home with more bedrooms and facilities.
Comments Mr Opperman, “An asset that provides a nominal return of 13% to 15% in capital appreciation will always be a good investment. Selling to realise that gain is very tempting; but owners must remember that there are many costs incurred in moving home: transfer fees, estate agent commission, relocation costs, and, of course, whether you are able to find a new home in an area that has a reasonable power supply or phone connection.”
There is also an emotional investment in a home, and moving out of your comfort zone can bring unhappiness in the long term.
“There is a lot to be said for staying put,” he says, “and investing in the quality of the home you already own. Upgrading the fittings will add to its value, and is easier to do than, say building from scratch in a market that is plagued by high materials costs and rapidly dwindling numbers of qualified artisans.
“At Absa, we maintain that investing in your property is still the best investment you can make, even if it is only a lick of paint. And it is always important to remember that your house is your home - it is more than just an asset. It is where you raise a family and entertain friends. And it is about what makes you happy. Don’t fall into the money trap to the detriment of everything else.” By Nigel Benetton

Copyright © Insurance Times and Investments® Vol:20.7 1st August, 2007
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