Continual reports of stock shortages by estate agents have prompted the question of why this is the case. According to Lew Geffen, chairman of Lew Geffen Sotheby’s International Realty, the shortages are across the board. He attributes them to the economy playing catch-up to the recession and political overtones, which have dampened the enthusiasm of sellers.
Neville Berkowitz, property economist and adviser to low-commission estate agency, HomeBid, believes that in addition to the slowing economy, there are three other reasons for a slowdown in properties for sale:
- High transactional costs such as traditional estate agents’ commission (5% to 8.5%, plus Vat)
- If applicable, capital gains tax of 13.6% for an individual seller
- Assuming the seller is buying another home, the payment of transfer duty of 8% to 10%.
“HomeBid’s quest in these financially difficult times is to save the seller some 6.5% in estate agents’ commission,” says HomeBid GM, Gary Sacks. “Fortunately, we are not experiencing any shortage of saleable, quality properties.”
Erwin Rode, CEO of Rode & Associates “presumes the shortages are due to the fact that the economy has stalled, so fewer people change jobs and relocate, thereby reducing the number of transactions”.
He adds that relatively little new stock has been added to the South African housing inventory since the financial crash in 2008, which explains why house prices are rising in nominal terms even though there is little economic growth.
Not a wide-ranging issue
John Loos, FNB Home Loans’ household and property sector analyst, is not “convinced that all agents have this problem, but a significant portion do”.
“I think it has much to do with a dramatically lower level of building activity following the end of the boom around 2008, constraining the growth in overall supply, while simultaneously the huge interest rate cuts from 2009 to abnormally low levels of interest rates that we currently still have, assisted a reasonable recovery in demand from 2009 onward,” says Loos. “It is interesting as to why building costs did not fall significantly as a result of a post-boom slump in residential new building demand, which would have boosted building completion numbers more. I can only guess that much of the supply side of the development/building sector folded with the end of the boom, meaning that there isn’t surplus production capacity in the building and materials sector. But that is a mere guess. It is just interesting that building costs didn’t seem to slump with the demand slump a number of years back.
“But is demand out of line with supply nationally? I’m not convinced it is. On a national basis, the average time on market of near to three months doesn’t seem like a gross mismatch between demand and supply. I think that’s exaggerated, and it shows in house price inflation in single digits (in all of the house price indices). A major stock shortage was back in 2004/5, and 30%-plus national house price inflation was the result.”
Demand and economic pressure rise
Absa Home Loans’ property analyst, Jacques du Toit, says transaction volumes are down compared with previous years against the background of macroeconomic (economic growth, employment) and household sector trends (income, savings, debt levels, credit-risk profiles, confidence) that eventually affect the property market, while the population and number of households continue to rise.
“However, people tend to stay longer with family and tend to rent for longer in view of financial pressures,” he says. “Then lifestyles are changing, especially in the metropolitan areas where there is a strong demand for higher-density property as a result of factors such as affordability of property, rising property rates and taxes, the scarcity and cost of vacant land and traffic congestion.
“Location is still a major factor in metro areas due to the proximity to amenities such as places of work, schools, retail centres, and so forth. All of these factors and probably a range of others eventually impact demand and supply, buying patterns, transaction volumes price trends, with over/short supply that can exist in some segments and areas.
“Estate agents are in a good position to see such trends and developments in the market, based on their historical experience and their direct interaction with buyers and sellers.”
Dr Andew Golding, chief executive of the Pam Golding Property Group, opines that the stock shortages would be a result of demand.
“Despite a current, rather gloomy economic environment, the residential housing sector is in surprisingly positive territory,” he says. “Our interpretation of this somewhat surprising trend is that housing demand continues to outstrip supply and like many other parts of the world, the housing shortage in South Africa, generally speaking, is on a significant scale in virtually all segments of the market. And while taking into account affordability concerns and constraints, that demand continues to fuel price appreciation and new stock supply.
“Since the middle of 2012 we started to see a trend of firstly nominal house price growth and then above-inflation house price growth across many segments of the South African residential property market. Within these there were and are, as to be expected, significant pockets of under- and over- performance, with an example of the latter being house price growth on the Atlantic Seaboard in Cape Town of more than 20% for the past 12 months.”
The great trifecta
Golding says three notable outperformers stand out – the lower end of the residential property market, the sectional title market and the major metropolitan areas.
Contributing to the high demand in the lower end of the market is South Africa’s largely young population, with growing numbers of aspiring first-time buyers. This is one of the factors impacting the surge in house price inflation in the townships, which according to an FNB’s Property Barometer note rose in the second quarter of 2015 by 17% compared to a year earlier.
“The sectional title market continues to outperform with the gap in price inflation particularly visible between the two extremes of large freehold property (four-plus bedrooms) and the smallest category of sectional title (less than two bedrooms),” says Golding. “According to FNB, a comparison reveals that in 2014 on average [prices in] the smallest category of sectional title property increased by 8.8%, while large freehold property prices grew by 5.6% on average. For the first half of 2015 the gap between these two widened further to 10.4% for small sectional title property compared with 5.4% for large freehold.
“This trend may be due to lifestyle choice and affordability issues but is perhaps also indicative of the young profile of our population. However, this needs to be viewed against the overall freehold versus sectional title market, which in 2014 saw the former outperform with an average price increase of 6.3%, while sectional title averaged 5.6%.
“In a prevailing trend in recent years the major metro areas continue to outperform with Cape Town currently the strongest (approximately 9.6% in May 2015, according to the latest statistics from Lightstone), but beginning to lose some momentum. Johannesburg (6.8% in May) and Tshwane (8% in May) both continue to gather impetus even as the national house price index is on a very gradual slowdown (5.3% in August). A net influx of people to Cape Town and Johannesburg has resulted in an increased demand for housing, which has been reflected in these two markets gaining market share in terms of their portion of total value of the South African residential market.
“Currently, while the market appears to be becoming a bit more challenging generally, and while house price growth appears to be softening, our prognosis for the balance of this year and into the first half of next year is a continuation of the current market conditions. These are characterised by a shortage of stock, banks competing with each other for mortgage customers and buyers frequently competing with each other for the same property, coupled with an on-going strong rental market.”