The property market has always been an attractive place to invest, but with the talk of prices falling further, is this the time to be looking at getting into the property market?

First off, one has to understand that growth in the property market has slowed significantly. From 2006 to 2007, annual growth rates of up to 30 percent were common. Few investments could give you that kind of return. After the global financial crisis, returns have fallen to single digits, with growth currently at a modest six percent per annum.

The property market has always been an attractive place to invest, but with the talk of prices falling further, is this the time to be looking at getting into the property market?

Warren Buffett has a contrarian investment strategy: “Buy when others are selling, and sell when others are buying.” Is this appropriate in today’s property market?

 Financing

In the peak years, about 13 000 offers to purchase were signed. The offer is a legally binding commitment to pay for property at a price usually subject to bank finance. In July 2011 that number was closer to 9 000, which represents a fall of 30 percent. The market is undeniably less active but still has a core of activity. As people get promoted or demoted, get married or divorced, the need for property continues albeit in a new form.

Banks are often fingered as the biggest challenge in purchasing property as “they don’t lend”. Indeed, during the glory days 79 percent of all applications received financing; this number has now fallen to just below 50 percent. A bank is a business, after all, and its key driver of revenue is lending. Banks cannot withdraw from the market. Currently the South African banks collectively have R1 trillion lent out in mortgages.

What has become common is the requirement for borrowers to put down some sort of a deposit to secure finance. The deposits range in size from about five to 30 percent, depending on the borrower and the amount to be borrowed. Eighty-five percent of all borrowers are likely to be requested to place some deposit, with 32 percent being asked for 10 to 15 percent of the purchase price. The cost of borrowing money is also increasing. Jan Kleynhans, CEO of FNB Home loans, is of the opinion that the era of home loans of “prime minus” are over, and “prime plus” will be the norm. This may discourage the bargain hunters in the property market who seek to buy property with as little of their own cash as possible.

A notable exception to the requirement of a deposit rule is the affordable housing sector, which is defined by most banks as the sector with a purchase price of below R400 000. This sector is by far the largest market by number of units. There are approximately six million residential properties registered in the deeds office, and more than three million are worth under R500 000. In line with the Financial Services Charter, banks are committed to lend R42 billion specifically to this market sector. Credit-worthy applicants are able to secure finance of 100 percent of the purchase price. Each bank has its own set of criteria, and it’s worth visiting them to understand the difference in their products.

Buying to let

A popular theme in the mid-2000s was “buy to let” property investing where investors bought properties and placed tenants into the property to generate an income and pay off the mortgage, leaving the investor with an asset that was worth more than they had paid and had the benefit of monthly cash flow. At the peak in the market, one in three offers to purchase was being made by investors, which drove up prices. This declined to about one in eight from 2009 to 2010.

This drop indicates a few challenges but also presents several opportunities. Undeniably, it is harder for a potential purchaser to get mortgage finance. This pushes them out of the purchase environment and into the rental environment. Property developers have only recently returned to the market with new developments. Supply had fallen by up to 50 percent measured by the fall in building plans passed and measured by Stats SA in 2009 to 2010. The rental market has grown significantly as buyers can’t obtain funding or they are taking a “wait and see” approach while they assess their household finances. You cannot look at the classifieds of any major newspaper and not see literally hundreds of properties being advertised to rent. Rentals are firming by as much as 10 to 15 percent in some areas.

Putting a face on the buyer

With all of this activity in the property market, it is important to put a face on the buyer in the market. The statistics show that 17 percent of the market is made up of first-time home buyers. This is significant in understanding the kind of product that buyers are looking for. First-time buyers are usually new to the job market and looking for somewhere to live that is located conveniently close to their places of employment; this group also includes couples looking for a starter home. An interesting trend given the stricter financial criteria has been siblings and siblings and parents clubbing together to qualify for higher bond amounts to buy properties.

The ascendancy in the market is clearly with the black buyer. Fifty-three percent of all sales are to black buyers. To my mind this is the most exciting statistic. Beyond the spatial discrimination of the past, the mobility of the educated, employed black middle class is set to change the demand patterns for property across South Africa. The growth of the market as a whole will be led by this group. Currently township homes perhaps trade once in a generation; compare this to suburban properties that trade once every seven or so years. Black females are increasingly prominent in the purchase of property. It stands to reason that if the largest sector of the population is procuring the largest segment of market, long-term demand is strongly underpinned.

Renting vs buying

Recent articles have expressed a view that renting rather than buying is the smart investment choice. I believe that nothing can be further from the truth. First, property prices may indeed be only growing at five to six percent per annum. To my mind, growth of five percent sounds a lot better to me than a loss of 20 percent on the JSE All Share Index.

Secondly, buying property using mortgage finance affords one the opportunity to pay down a debt while benefiting from an increase in the asset’s value over time. Imagine the following scenario. You have the opportunity to buy or rent a one-bedroom apartment in Northcliff, Johannesburg. The rental could be around R5 000 per month, and after five years you would have paid R300 000 and have no financial benefit for that payment over time. Buying the property would undoubtedly be more expensive initially, with the mortgage and levies perhaps being R6 500 a month. At the end of five years you would have paid R300 000 into your mortgage and have seen a 25 percent increase in the value of your asset.

Investing in property remains the most exciting empowerment scheme. As far as “get rich slowly” plans it has shown its shine over time. If you had bought a modest property for R200 000 in 2000, using the annual growth rates of the market, that property would be worth around R700 000 today.