Property: the good,the bad and the ugly

Residential property in a seven-year bear market.

I have been following the debate on residential property ownership currently raging on Moneyweb with more than a passing interest. I myself have in the recent past ventured into this sacred area with my own views on the buy-to-let issue and whether it is a good investment or not. My research has shown that the net yield on average for rental properties is below 3% per annum.

The current debate is a much broader one: is a residential house an asset or a liability and is it a good investment?

Considering the torrent of views and comments, members of the Moneyweb community have some very strong views on this subject.

The debate about the investment merits/demerits of residential property that has been raging on these pages for a while now, reminds me of two of soccer lovers arguing about the outcome of the World Cup soccer final without either one referring to the actual score.

The whole debate is based on emotion, not fact, it seems. Not one of the numerous comments appended to Patrick Cairns’ original article or the rebuttal argument by Craig Gradidge quoted any reliable statistics to either prove or disprove a point.

Some make money in property, while others are not that successful, and that experience normally shapes the respective views in this debate.

But what do the actual numbers say?

Unlike listed shares, exchange traded funds, currencies or commodities – which are tracked and measured almost by the minute – trying to find reliable and accurate statistics on residential property prices in South Africa is fairly difficult and is not that open to public debate and scrutiny. This could explain why people respond to this debate from their own personal experiences rather than resorting to more objective criteria.

To this end I wrote to an old friend, Jacques du Toit, a property economist from Absa; I requested a comparison of average property prices in SA since 2000, with the Johannesburg Stock Exchange, money market investments and inflation (see comparison data here). This, I think, is far more scientific than an emotional and often superficial debate about residential property.

An analysis of the data shows two distinctive trends. From 2000 to end-2007, residential property was not a bad place to be and home-owners experienced a nice uplift in the value of their homes and hence their personal balance sheets. Also, considering the fact that most average homebuyers inadvertently use gearing (bond finance) when they purchase a property, they would have seen the asset side of their balance sheet increase very nicely indeed.

However, since January 2008 – almost seven years now – that trend has reversed and average property prices have not kept pace with inflation. And when compared with an investment on the JSE, the situation is substantially worse. Over this time inflation is up by 28% and average property prices up by 23%, while the JSE has just about doubled. To download the data which I obtained from Du Toit please click here.

The Bank for International Settlements, a sort of central bank for central bankers, also tracks residential property prices across the globe. A survey of inflation-adjusted prices in G20 countries affirms the negative growth for SA property prices since 2007, with a decline of 7% in real prices to end 2013. Brazil incidentally tops the list with a rise of almost 80% with Italy and Russia the worst performers over the same period.

Go to for the full picture of residential property prices across the globe.

Property in seventh year of bear market

There will, no doubt, be property owners who have had a different experience, depending on timing and level of gearing, but the facts speak for themselves: residential property is currently in a bear market, with perhaps the exception of areas on the Atlantic Seaboard in Cape Town and certain gated communities. For the rest, the news is bad and unlikely to get better soon.

Residential prices rise rapidly when certain conditions are present, namely availability of bank finance (currently scarce), economic expansion (low growth and declining), rising confidence (lacking) as well as demographic factors. The traditional buyers of residential properties are getting older and scaling down while the emerging market buyers have not developed sufficiently to take up the slack, or in many cases are not able to obtain mortgage finance due to historical reasons.

Very few of the conditions which normally precede a real increase in property values are currently present. Economic growth is plunging, interest rates are rising and in some cities and towns the utter failure of municipalities has added to the problem.

Such a scenario is particularly bad for ill-informed investors who have, or intend to, venture(d) into the buy-to-let area. Rentals are not rising in line with inflation, the non-payment of rentals is increasing, while sharply rising land taxes are eroding whatever profit there might have been. Property owners might be lumbered with the ever-rising costs associated with property ownership for a very long time.

To summarise: tread very carefully when you are enticed into buying a second or third property as a rental generator in your retirement.

The good

In the past I would have automatically, almost instinctively, disagreed with Ann Wilson, author of The Wealth Chef – the book which I am currently reading. I now will qualify my disagreement by adding that a residential property bought at the right time and in a good area could be a very good investment. But there is a proviso in the new South Africa: as long as the area does not succumb to the effects of demographic contagion and municipal decay, both of which are a reality today.

Property is a forced manner of saving and the first R2 million in profit is exempt from capital gains tax.

I also don’t buy the argument that you must rather rent and “save the difference in shares, unit trusts or exchange traded funds.” My experience is that very few people have the discipline to stick to the plan, good as it might be on paper. At the first sign of turbulence in the markets money is whipped out never to return: money is spent on luxuries which rapidly lose their value, such as motor cars, furniture, appliances and overseas travel.

In this context it’s wise to remember one of the so-called Parkinsons’ Laws, namely “Expenditure rises to meet income”.

A house in a good and growing area where there is an increase in economic activity can be a solid investment over time. Gated communities are most certainly the best option. There are very good reasons why houses in gated communities are trading at a premium of up to 25% to similar properties not gated. In the Johannesburg area anything close to a station on the Gautrain route must be a consideration.

I would also choose Cape Town and Stellenbosch over most other areas in the country. There is a reason why the “semi-gration” to the Cape continues with no end in sight. The Western Cape is a much better managed province than the eight other ones, and this is reflected in average property prices.

The bad

The seemingly endless implosion of many of our former vibrant and growing towns across most of South Africa must be destroying wealth for the owners of properties in these towns and must be a matter of grave concern. I travel a lot and I have seen first-hand over the last ten years or so how towns such as Bloemhof, Wolmaransstad, Lichtenburg and even Zeerust in the North West Province have wasted away.

There are other such areas in our land where, in line with the deterioration and collapse (in some cases) of the infrastructure the residential property market has effectively stopped functioning in those areas. Many people who have held on to their properties in those areas in the hope that it would provide some kind of a nest egg, have seen what was their biggest asset waste away.

The ugly

There cannot be a worse investment in the current economic climate than a vacant stand or an empty plot of land. And to make matters worse, in the current economic climate you cannot sell it or even give it away, as it is a liability which nobody wants.

Prior to the Great Financial Crisis of 2007, a combination of slick marketing which preyed on greed and stupidity resulted in hordes of these off-plan developments being brought to the market, many in far flung places which, in hindsight, had no chance of succeeding financially. I can think of many such untold developments in places like Hartbeespoort Dam, the Vaal Dam and Vaal River, Langebaan and Shelley Point in the Cape, as well as others in KwaZulu-Natal and game reserves in the North West province.

There must be thousands upon thousands of investors who are repaying bonds on these worthless pieces of land, in addition to the rates and taxes and homeowners levies. I often scan the properties in sales of execution ( and it is notable how many are empty stands in these, and other areas, which are being sold in execution.

I have many clients who have been trying to sell their plots for years and, even at half price and more, there are no buyers. All it does is create ever-increasing work for lawyers and debt collectors.

Unless you are buying to build immediately my advice for people is to stay away! Never again in my life will I fall for the argument “they don’t create any more land…”

Here I agree fully with Wilson that an empty plot of land is a massive liability. I would guess that most investors hanging on to one or more of these empty plots would not get half of what they paid for it in the boom times prior to 2007.

To that one must add that other South African addiction for the middle-class wannabes: the home at the coast. A couple of weeks ago I spent a weekend at St Francis Links and witnessed first-hand the withdrawal symptoms of this addiction, not only on St Francis itself but also on the surrounding areas of Cape St Francis and St Francis Bay. Row upon row of holiday homes, built with cheap and available money from the banks, now stand mostly empty with virtually every second home on sale.

An investment? I think not.

Rather invest that money in a good portfolio on the JSE and draw enough money annually from the portfolio to rent someone else’s liability when and where it suits you.

I don’t want to be a spoilsport when it comes to this issue, but a boom in the residential property market is not on the horizon. In fact, it might just take a while longer before we see any meaningful uplift in average prices.

*Magnus Heystek is an investment strategist at Brenthurst Wealth. He can be reached at or for ideas and suggestions.



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