RealNet MD Jan Davel believes with tighter economic conditions over the next two to three years, sellers are likely to be more negotiable, thus presenting “excellent” opportunities for investors. But not everyone agrees with Davel that house prices will resume an upward trajectory within this period, or that investors should be prepared to carry all the costs. Taking a longer term view over the medium term, however, which he also advises, appears to have gained some consensus.
Says Ewin Rode & Associates CEO Erwin Rode: “Investors who cannot buy a house for cash, need not be in a hurry to buy as I do not see much growth in prices and rentals over the next five years. By ‘not much’ I mean below the inflation rate. The moment an investor significantly gears the purchase of a house, his cash flow goes negative; and if one cannot have a reasonable hope of at least strong capital growth, such an investment makes no sense.
“However, cash purchasers can, as a generalisation, expect a net income yield on market value equal to money-market yields, plus maybe modest capital growth. So for this category of persons, buying a house in the current investment climate is worth considering. However, a further factor to consider is that for tax payers who still do not earn interest income, an interest-bearing investment could be tax-efficient.
“The reasons I do not expect much capital growth for houses in the medium term are: interest rates that are unlikely to come down from the present, and are in fact more likely to move up from the current level; as well as disposable incomes that are under pressure and building costs that are hardly growing at present due to low building activity. However, taking a medium-term view, it must be said that building-cost growth will sooner or later have to return to somewhere near the consumer-inflation rate (CPI) as input costs (labour and materials) are still growing apace.
“The duration of the present stagnation in the SA economy depends partially on external factors (the world economy and commodity prices); so we are talking here about likely scenarios,” says Rode.
John Loos, FNB Home Loans household and property sector strategist is also of the view that we are moving into a period of long term economic stagnation, which will keep property price growth low. “I must admit, though, that the extent of supply constraints in recent years has surprised me, and has been key to recent years of real price growth where demand has not been overly strong.” On a lighter note he adds that Davel’s view that investors should not expect short-term gains, reminds him of the saying that ‘long term investments are short term investments gone wrong’.
Davel says buyers and investors who are intent on increasing their property portfolios will have a definite advantage if they make the most of the current lull.
“Higher interest rates are already making it more difficult for many prospective buyers to secure a bond. This, added to slower economic growth, spells a drop in sales that favours investors, because it tends to make sellers more willing to negotiate price,” the estate agent says.
“In addition, there will be more owners who find it difficult to keep up their mortgage payments and wish to sell quickly to relieve the financial pressure on their households, or in order to avoid foreclosure.”
However, those who are investing at the moment should not be looking for short-term gains, Davel advises. “This is not a speculators’ market. Current investors should have the patience and resources to wait at least until the next upturn and, more importantly, to carry most of their bond and property operating costs themselves if necessary.
“The reason is that although rental properties are currently in high demand, actual rentals are unlikely to rise much over the next two to three years. Landlords who have found quality tenants will not want to risk losing them by raising rents too much when they know they are also struggling with higher food, transport and utility costs.”
Nevertheless, he says, investors who are focused on long-term capital gains as well as rental streams stand to do better if they make careful and selective purchases now than if they wait for the market to cycle upwards again.