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Residential property: A 10-year bear market

Sell Western Cape, buy KwaZulu-Natal.

One of these days I am going to sacrifice a precious Saturday of mine and attend one of those Think and Grow Rich property seminars. Or even one of the Robert Kyozaki-inspired gatherings along the same line, where mostly young and inexperienced wannabe property investors are attracted to make their fortune in the residential property market.

I need to understand why — having been an investor in property for almost three decades — I seem to have lost my touch. I am not making money in the residential property market, with the exception of a small getaway pad I purchased in the Western Cape some two years ago. What am I missing? What am I doing wrong?

My other residential properties — in good areas — have delivered little capital growth while rental growth has been negative for several years now. In fact, the rentals I am achieving today on two properties in an upmarket gated estate in the northern suburbs of Johannesburg, are less than I earned on them five years ago.

Capital values have also not moved an inch while levies, rates, taxes and upkeep have been rising at almost double the inflation rate.

I have tried selling them on and off over the past several years, but have not had even a nibble of interest. There simply are no buyers. And if you happen to find a buyer expressing some kind of interest, the answer comes back: bond application denied.

Exactly the same is happening with two other properties close by — not as upmarket — but also stuck in the same destructive wealth-destroying pattern: rentals lagging but costs soaring. And again there is not much I can do to get rid of these investments.

My experience, I sense, is more widespread than commonly reported in the media. By and large most media houses don’t spend a lot of time analysing movements in the residential property market any more, apart from the occasional piece of sunshine journalism concentrating on the handful of homes that go for astronomical prices.

I get the impression that many of these properties actually sell for substantially less than what they are marketed for, as much as 20% or less.

Why do I say that? I often make a note of some of these expensive properties that come into the market at massively inflated prices, especially in Cape Town. When I try and get a sales price from the estate agency concerned some weeks later, I am often told that the sale has been quietly withdrawn from the market.

The total number of these properties in South Africa that sell for more than R20 million are probably not more than 100 to 200 at best. That does not represent the property market where us mere mortals dwell.

True facts and figures

I need to find out how these property-promoters manage to twist the facts and figures relating to the SA residential property market in order to convince wannabe property owners to get involved in a market which, on average, has declined 23% in real terms over the last ten years. In some parts of the country, the market has started declining in nominal terms as well. More and more, I am confronted with anecdotal advice from investors in various areas of the country, especially large swathes of the countryside, where a normal functioning property market doesn’t exist anymore. For all intents and purposes, billions of rands of properties have been sterilised by this growing trend.

In my opinion, the performance of your residential investment is determined by four factors:

1.    The actual rate of increases in the nominal value of the property;

2.   The rate of growth in the rental paid (if the property is rented out) for the property;

3.   The cost of money; and

4.   The rate of increase in rates, taxes and maintenance.

A contributing factor is the availability of money (bonds) but the impact of this on property prices is hard to determine, yet it plays a significant role in either boosting property values (during boom times) and acting as a drag, such as now, when prospective buyers fail to qualify for mortgage loans.

Firstly, let’s look at what property prices have been doing on average over the last ten years. I use the research from FNB, but one finds the same results from Absa and Standard Bank. 

Over the last ten years, the average residential property has declined on average by 23% in real terms.

This is despite the fact that average property prices in the Western Cape have been growing at a rate higher than inflation. By value, property sales in the Western Cape make up about 25% of the overall market, which means that average property prices in the rest of the country have declined even more, whether in real or nominal terms. I would guess that in many parts of the country average property prices are lower today in nominal terms than they were five years or so ago.

Western Cape slowing down

The rapid slowdown in prices in the Western Cape, which was already evident in the third and fourth quarter of 2017, can no longer disguise just how bad the property market in the rest of the country really is doing.

Read: Cape Town house prices slow amid water crunch

Estate agents are known to be notoriously bullish about the property market. Almost every opportunity is used as an excuse to exhort prospective buyers that “now is a great time to buy”. Most people see through that kind of marketing as opportunistic in the extreme and don’t normally fall for it any more.

But the most cynical press release I have seen in a very long time, came from the Rawson Property Group some two weeks ago or so, where Day Zero in the Western Cape is actually seen as a great time to be buying property.

The reasoning was as follows:

1. The drought will push people from the land to the cities, and hence push up demand, and;

2. The lack of water will slow down the construction of new developments and hence prices will rise.

To me it signals — and this has been confirmed by several key players in the Western Cape property market — that off-plan sales have hit a wall. A colleague of mine was only last year bragging about how many offers he had on his new townhouse in Sea Point, but when he tried to put it on the market last month, there was not a buyer in sight.

On Property24, there is an increased number of properties coming onto the market in areas such as Camps Bay, Hout Bay and Mouillie Point at reduced prices. One did not see that until very recently.

There are mainly two reasons for this (apart from the water problem). One is that prices have simply outstripped what the market can bear. When apartments were selling at anything between R70 000 to R100 000 per square metre one knew that the end was nigh… high prices are the cure for high prices.

There is a limited pool of wealthy South Africans who are able and willing to spend such outrageous prices for property. Like all markets, this seven-year bull market in the Western Cape is now pulling back dramatically.

The other main reason is that the flow of people moving down south is slowing down, perhaps even dramatically. I often speak to potential-semigrants to the Western Cape who come back after a property search, utterly disgusted with what they can get in exchange for their very large and comfortable home in Johannesburg, Pretoria or even Durban.

The disparity — apart from all the other costs — in selling up and buying in the Western Cape is simply too massive to bear for many people, despite the much-vaunted attraction of living down south.

Other factors include the traffic (now the worst in SA) and the upsurge in crime. For a long time the Western Cape did a great marketing job that living in the province somehow was more relaxed and stress-free than the rest of the country. Try and tell that to someone who has to leave Durbanville or Blouberg at 5am to get to the office at 8am.

It seems that investors and semigrants have started looking elsewhere, particularly northern KwaZulu-Natal. Latest figures seem to indicate that Umhlanga and Ballito have now become the fastest-growing areas in the country. Estates like Zimbali, Simbithi and soon Blythedale Eco Estate will be getting much more attention from property owners from Gauteng wishing to relocate.

Rental growth stuttering

If your capital values have not made any money, on average, over the last ten years, maybe you’ve benefited from rapidly rising rentals. Again, the official statistics tell a sobering story of how buy-to-let has become buy-to-regret and now buy-to-sell (at any cost).

Read: Buy-to-let has become buy-to-regret

Accurate statistics on rental growth used to be scarce and anecdotal. The website of specialist credit bureau TPN gives an accurate picture. It takes the skills of Sherlock Homes to actually find the data on rentals in SA.

The latest quarterly numbers tell the following horror story:

1. Nationally, only 67% of all tenants pay on time. A further 16% pays late or by arrangement while 5.9% simply don’t pay. That’s right, folks, almost 6% of residential tenants simply don’t pay their rent, and the poor owner has to spend tens of thousands of rands in lawyers’ fees/court cases to legally evict a non-paying tenant who in many cases is deliberately hiding behind the law not to pay his/her rent. 

2. The national vacancy factor (Q3:2017) was at 5.9%, fortunately down from 8% in the second quarter. What this means is that almost 12% of all residential property is either empty or the tenant is not paying anything.

3.  The Western Cape (89% on time and in good standing) is the province with the better paying tenants while Gauteng is the worst of the big provinces with a percentage of 82%.

4. Rental growth itself has averaged about 4% per annum since 2011; peaked at 9.8% in Q4 2013 and is currently standing at 3.4% and declining rapidly. When compared to the average consumer inflation rate since 2011, average rental growth has been negative 1.45% per annum.

5. Rates and taxes nationally have been rising at about 13% pa over the last ten years, while maintenance costs, too, increase as a property gets older.

What happens when you decide to sell?

The nightmare doesn’t end. Unlike a listed instrument where you can get out at the click of a mouse, it now takes up to six months in the current market to get rid of your poorly-performing investment. According to the latest FNB Estate Agents Survey, houses in the high-net-worth band (average R2.335 million) now take 23 weeks to sell on average — that’s almost half a year! Houses in the so-called upper-income area (average R1.24 million) take 17 weeks and middle-income area (average R887 000) take 14 weeks to sell.

Ah, say the property pundits, what about gearing? The age-old chestnut when you discuss buy-to-let. A little bit of your money (deposit plus transfer fees) and a lot of money from the bank (mortgage) and you are on your way to riches. Let the tenant pay off the bond (he isn’t).

Gearing only works if the growth of the underlying investment rises faster than the cost of capital, and this has not happened in SA for almost ten years now. While some investors might still be fooled by the illusion of wealth by virtue of owning a property, the illusion has been shattered by low capital growth and the equally low rate of growth in rentals. 

I recently did just that on the plot of land I purchased for R950 000 in 2007, just before the property boom came to a shuddering halt. My bond repayments, plus levies plus rates and taxes invested into a good performing unit trust would today be worth about R2 million. The property itself (any takers please!) is worth not more than R100 000 at best.

This article was researched and written before the dramatic change in political power from Jacob Zuma to Cyril Ramaphosa. A new sense of optimism and hope in the future has engulfed the country, its people and its investors. This might just be the turning point in terms of economic growth and rising asset values (which have been flat for many years) property and listed securities. We are owed a bull market in some asset classes, hopefully residential property. But then along comes the policy of “property confiscation without compensation…”.

Magnus Heystek is investment strategist at Brenthurst Wealth. He can be reached at magnus@heystek.co.za for ideas and suggestions.

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COMMENTS   68

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Would appreciate help on understanding rates. I’m a recent property owner so don’t have years of data but the rate went up 6.2% in July last year, I assume inflationary increase. I’ve just received notice that the property valuation will be increased. Isn’t that paying inflation twice?

Inflation is a market force and measured only after the fact (one does’t pay inflation, so obviously one cant pay it twice).

Rates are what you pay for services (water, sewage, elec, refuse removal) and property tax is well, a tax )this is where the valuation roll comes in). So those are separate things and even if both increase, you are still not paying anything twice.

Value pre reval: R1m
Price pre increase: 0.006916
Rates per month: R576.33
6.2% increase in price to 0.007345
10% increase in property valuation to R1.1m
Rates now R673.29, a 16.82% increase
Hence paying inflation twice

Wooosh! I am saying you are using the incorrect terminology for various things.

As supersunbird already indicated you may have terminology mixed up — the annual increase in property rates&taxes are not based on inflation.
They are connected to the open market value of your property and also the additional revenue required for municipal services.

Western Cape still working for me

I watched JM speech in response to SONA, trouble is on the horizon for any property owners – if CR tries to appease White Minority Capital and tries to steer ANC away from expropriation of land without compensation. Interesting times!

So was the Titanic at 2am….

Haha, true!

But remember the foreign buyers in Cape Town – anecdotally: my road (cape Town city bowl) is all German and the Cape Town prices are, to quote, “unrealistically cheap”.

Wait till yhe rate increases hit through revaluation. The true real return is under pressure.

It is always best to evaluate a property investment on a case by case basis
A Guide To Residential Property Investment

I agree.
Physical real estate is very different than other asset types, and from one individual to another within the same prevailing circumstances the results could be night and day.

The new rates and taxes valuations I’m getting are increasing by between 50% to 100% I literally for know what to do as it is going to wipe what little profit I was making on my rentals. And if I lose a tenant I’m in severe problems. So gatvol!

We dont see the negative property reporting in the media because of the revenue media houses generate from the big estate agencies.

The property unhappiness is related to the famous going two ways travel at the same time. Impossible, normally, but not in S.A. It works in a so called self supporting country like the U.S/Russia/E.U for some time. But not all. Keeping interest high in the interest of a strong currency is one way. The other, a booming industrial sector. Producing for local and export. Resulting in possible booms. Property is one of them.

An important contributing factor is the very few mortgages that banks are granting these days. This is because of politicians threatening property rights across the country – They are destroying value whilst expecting ever increasing property rates – Ignorance at its best!

Traffic from northern suburbs into town is not always that bad, depending on your location and the time of the day. I leave home at 6:00 from Panorama area, park my car in our building in City Centre, walk to my office and enjoy my 1st cup of coffee at 6:45.

Since we are sharing, I leave home at 8:00 and have my 1st cup at 8:20.

Right next door to your asylum then…

Thanks – I will change my working hours ASAP!

Rumor has it that a “massage parlour” in Panorama got closed down for too many happy endings. People gotta de-stress after a long commute I guess.

Nothing wrong with a little rug and tug after a long day…

Beware of financial advisers and fund managers warning you against investment in physical property. They don’t make a cent if you invest in property, but ironically, they will warn you against estate agents punting property. a Classic case of double standards.

Exactly,
At R16 to the dollar Magnus said go offshore quickly.
Now that he has had a terrible two months he gets bored and writes this drivel.
The author’s life is a contradiction he tries to manage. He lives here but hates the Government and says investing here is bad. Rather focus on the capital you need to replenish for your clients who left at R16 and R20 to the dollar was a banker.
There are Billionaires in property that he could sit down with and get the clues.
What’s actually sad is that this article gets published. Would any of us get published on something we know nothing about but think we do because we lost money it?
Magnus – Do you know that Troyeville and Rosettenvile grew 25% last Year.

Yup, when Zuma did his antics I lost R100,000 from those investment funds. They were not doing anything before anyway. Changed my entire portfolio now 80% in property and doing well. You just need to follow a few very important rules…location location location, then getting a really professional managing agent signing with thoroughly checked out tenants, and a good lease agreement. Now you have capital growth and revenue streams escalating each year. The only way to go, assets that produce real tangible income. Your financial advisor wont like that. He earns nothing and will tell you the property market is bad. Look at their equity portfolios. They have earned you nothing for several years now! Becoming a property owner has its risks, but if you do your homework right, and put in the effort, it is a much better place to have your money than equity or retirement annuities or any other kind of pension fund where you need to die quickly before the money runs out. Our investment gurus are not Warren Buffett, neither are we, so lets stick to something we actually understand.

I’m an in the lower middle income bracket and the buy to let market has far outstripped the monthly income. The lessors of the letting market should’ve seen this coming and to be honest, I’ve got no sympathy at all, in fact I’m extremely angry. The yearly increase of salaries in the private sector is far below the actual inflation rate of approximately 7.25%. For reasons beyond me, the lessors in the buy to let market are under the impression that everyone is earning the highly inflated salaries of Government employees of the Zuma era and beyond. The Government should never have scrapped the Rental Act as this had given the middle income earner respite from the sharks in the tank and at the very least the prospect of saving to one day also be in a position to purchase a property. No thanks to the sharks in the buy to let market the middle income earner can hardly afford basics as food, water, electricity, etc., after paying the highly inflated monthly rent as we, after all have to “pay” the lessors’ monthly bond payments. It’s for the same reason that the retirement villages have also become the playground for the sharks in the tank and no thanks to them they’ve got no idea that some of their lessees in these retirement villages have to get assistance from Meals on Wheels to survive. Shame on you!!!!

It’s all the government’s fault. As usual. Greedy landlords (lessor’s as you call them) ripping off poor tenants. The regime did not go far enough- they should have banned the buy-to-let market or at the very least capped their return at 1% of the property valuation. Sort out the greedy buggers once and for all.

I say sort out the jealous tenants.

South Africa has a serious problem of not having enough rental stock for its people. With rental control which no doubt will favour the tenants, together with the evictions already favouring tenants, this problem will be become much bigger than it currently is. Risk vs reward. It’s not easy being a landlord, so I’m unsure why everyone see them as the ultimate evil. Imagine most landlords sell their stock as risk as become too great, would you want to depend on government to take their place and supply the necessary stock? One tenant can easily erode most profits quite easily

That comment about only 100-200 properties over R20m in SA is amusing. There are suburbs in Cape Town with 100-200 properties over R20m and individual properties over R200m.

But overall agree that there are better investments than residential property. But beware the JSE listed property bubble – they have more value from revaluation journal entries cash backed transactions. If you must do property do middle class industrial / commercial.

One of the reasons in the lag between listing your property and when it sells.
Estate agents give you an unrealistic valuation of your house so that they can get the mandate to sell. When the real market comes to view the house the figure is somewhat deflated and the seller is forced into making a decision on the lower price.

Property investors are not alone. There are still people who invest in gold mines because they had a huge rally in the 70’s! People believe in property due to the law of random rewards I suppose. When a regular reward ends, the reaction stops, but when a random reward ends the subject will keep on performing his acts because the next reward might be right around the corner.

Few property investors realize that the biggest boom we ever had was due to the declining government bond yields. The boom in the price of government bonds led to the property boom. In reality, the property investor indirectly speculated in government bonds without him being aware of it.

Being under the impression that you are a property investor while you are in fact a bond speculator can not only be very confusing but can also be very dangerous.

The USA bond prices recently reached the end of a 40 year bull market. The bond prices entered a bear market now, leading to rising interest rates over the longer term. The biggest driver of property valuations just flew out the window. The bond market turned around, and the property market will follow. Any book about investments in property that was written within the last 40 years is now irrelevant.

My problem is this – 98% of my assets are in property.

Thanks, Sensei. There is another take – mine. The US Federal reserve (not part of the federal government) embarked on a process of bond buying to pump up money supply and prevent a replay of the GFC deflationary collapse. This had the desired effect in that the economy was flooded with newly created money but they thought it would lead to inflation but it just led to more deflation as most of it went straight back into the bond market where speculators preempted the fed and made a risk free profit by shorting shorts and longing long bonds. A classic straddle with zero chance of yield inversion while the Fed was routinely returning to the market to feed on its mandated open market transactions. This spilled over globally and depressed bond yields worldwide.

Of course property and bonds always compete with one another. In a rising interest rate market property yields must also rise. This can be accomplished by falling prices prices or rising rentals or both. Not all doom and gloom. Likewise share prices must fall or earnings must rise. Remember property is an inflation hedge. Rising interest rates are the best indicator of accelerated rising prices i.e. bond investors demand more compensation for holding bonds.

Thanks Richard. I agree 100%. With rising bond yields, property returns to being only an inflation hedge. Property prices had the wind of increasing affordability in it’s sails while yields were in decline. The wind has turned direction internationally, but the rising tide of inflation will still support property prices. You know as well as I do that it is the devaluation of the purchasing power of the currency that creates the false sense of profit in both the property and share market.

Now if this is true, we have to find the instruments that offer the best hedge against the actions of the Reserve Banks. Here I am a follower of the Austrian Theory that states that the parties closest to the newly created money benefits most while parties furthest from the newly created money suffers the most. The middle-income earner in South Africa, who is the one to support property prices, is rather far removed from this newly created money I believe.

The real multi-million dollar enigma for the focused investor to unravel, is what sectors, in which countries will benefit most from the devaluation of the international reserve currency. Where will this newly created money go to? It seems to be going into the Nasdaq, SP500 and the NYSE at the moment, but eventually it will reach the emerging markets as well I suppose.

Thank you for sharing your insights and ideas.

I do not understand. Reserve Bank decisions affects Repo rate which affects prime rate , which affects house prices. Government bonds? How does that affect repo rate?

Beeshaas- the Reserve Bank like you to think they are in control but in reality interest rates are a market phenomenon. Bond rates are the best measure of interest rates. The SARB gets its cue from the bond market.

Bond rates -> repo rates -> prime rate

When inflation rears its ugly head, then interest rates rise as bond holders require more for their capital. This means prices of existing bonds fall (yield rises) and new bonds issued have a higher coupon rate i.e. higher cost of servicing new debt.

The only way that the central bank can influence rates is by bond sales or purchases but it can have unintended consequences depending on where the new money flows.

This comment was received via email:

Hi Magnus

I enjoyed your take on the property market. I concur with your argument. There’s no money left and prices ran too hard here in Cape Town. I have been looking to move to a cottage recently. Advertised prices have been steadily reducing with zero buyers. Supposedly ” cheeky” offers ( as one agent told me), are actually realistic offers if you can get an offer.

One cottage in a very desirable area started just over R 8 mill. Reduced to R7,6 mill after about 3 months. They had an offer for R6,8 rejected but the agent whispered in my ear that R7,15 mill would be accepted…
ummm ok but how about R7mill? They would take it I know…..So from R8,1 to R7 is a 15 % discount….in my opinion that would reflect the general market state. However. If you look at the returns over the last couple of years if you bought well, you’ve still done ok, but going forward I can’t feel any pricing upside soon. Ain’t no money around.

Seems the only big buyers could be foreigners? However, considering the rand strengthening, in pounds, for example, your Cape swallow getaway is now much dearer.

R10 million at R24/£ = £416 666 ; at R17/£ = £ 588 235….a £170 000 difference? That’s a chunk of money……

On a brighter note, the Northern Hemispherians have to have sunshine and they love RSA, and our new political stability? Should keep them in the market but only for select market sectors i.e. At waterfronts, beaches etc…..

I’m calling it quits on two props……time to stoke up cash offshore……or biotech stocks?

Best regards
Dion.=

“Gearing only works if the growth of the underlying investment rises faster than the cost of capital” who cares if it rises slower than he cost of capital if the renter is covering the cost. Solution to non-paying renters. Get two bums of the street and let them stay in the living room, supply them with lots of alcohol.

Ha ha ha, now there’s a plan, lovely comment.

I see a business opportunity – RentaBum

vacancy:

Homeless smelly person required
Need to have a big alcohol problem.
A loud extrovert preferred
Bonus if clothes stink of urine.

Payment: free alcohol and accommodation.

What if the bums decide to stay ? You invited them after all.

Cape Town properties are about to be hit with massive rates’ increases, let alone higher water charges, to compensate for the expensive desal/aquifer projects. CoCT will be R billions in the red.National govt doesn’t have the money to bail them out.See what that will do to property prices in the ‘fairest cape’.Will it be worthwhile living in Cape Town any longer?

questionnaire – you read like a Viceroy report. The answer to your question is quite simple – YES. Cape Town offers a fantastic lifestyle on your doorstep even with the water etc problems. FREE entertainment in abundance – beaches, mountains, countryside, art galleries, museums, the Waterfront……..

Justin B, on the 1st day of DayZ, I can promise you that people won’t give a damn about the beaches,mountains, countryside, art galleries…or ‘cheap’ properties.

Wait for the smug Capetonians grootbeks when Day 0 strikes (and it surely will)

They have a de-facto PAC Mayor in charge, with a 30-year-old PAC speechwriter in charge of their self-inflicted water disaster management.

And Zille will be put out to pasture in 2019…..

With the rise of Cyril, the WC/CT will be run by, at best, a coalition, or at worst, ANC-led

Then you will see Cape Town property really implode, with the so-called “demand” drying up faster than Theewaterskloof….

The growth in Cape town in particular(the Western Cape is too generalised) over the good years was underpinned by mainly European investors who fork out their euros for a place in the sun for relative peanuts. Further to this, returning patriots having worked overseas with hard currency in their pockets also found it cheap and a relatively safe investment being far from the grabbing hordes up north. Cape town is on finite land surrounded by mountains and sea. No new roads can easily be built and when the masses descend there are traffic issues and now critical water issues. I agree, its become somewhat unpleasant and there will be a retracement in demand. So by all means, go back up north and buy in Ballito etc, it sounds like an idyllic move, but very few europeans will push up prices there and swathes of sugar cane fields await development so don’t expect any stellar return on investment as supply and demand is what ultimately causes inflation in property just like everything else.

Yep …. the social assets in Cape Town far outweigh anything anywhere else in the country. The traffic is a gridlock in rush hour (which is now hours) but this is really as a consequence of the failure of the Metrorail system which in my opinion is being sabotaged by the taxi industry and fuelled by the gangster ridden drug trade.

If we can stamp on this criminal element and get the trains back on track (literally) the traffic will ease dramatically.

Same as all those Brit and Yank pensioner visitors, Magnus appears to be under the impression that Cape Town – and the Garden Route, probably – are all that the Western Cape comprises. That’s quite incorrect, as most South Africans are aware. While I agree with everything he has to say about CT, there are far more salubrious yet sensibly priced areas in the Western Cape. Just don’t expect to find twelve cinemas and fifteen takeaways in the dorp, though. Oh, last thing, brush up your Afrikaans …

Magnus

never thought I would get to say to you – “been there done that”

I got out of Fresnaye – with nearly 100% ‘return’ and invested in KZN North Coast. I bought a lovely house, on the beach – belonging to a very rich SA’n a few years ago and it is our favourite place to visit.

Althought buyers are few at that level – I can return 50-60% on money invested right now.

BTW I do not rent out – all my houses are fully furnished, fully functional and clean and a pair of my reading glasses next to my favourite chair(s) next to the book I was reading last.

KZN North coast has the weather, easy access to a lovely airport, relative good security good world class shopping and many hungry buyers in the mid range prices – which in my mind pushes up the higher value houses.

Interesting to see many well-known faces in Ballito over Christmas – the same faces I used to see in CT and Plett over holidays. More and more people are relocating families in KZN – many flights daily to choose from and I am always about 2 hours away from my Sandton offices in case of need – when I am in SA. KZN airport has at least 4 flights to UK and EU per day, if required.

With CR and the resurgence of the ‘sane’ ANC, I am considering spending even more time in SA

The main reason people want to leave Gauteng for the Western Cape is precisely the reason they wouldn’t want to live in KZN – but you do need to live in Gauteng to know that.

“I need to understand why.”
“What am I doing wrong?”
Simple answer is that previously you did not have to contend with the Zuma factor.
The 10-year bear market coincides with Zuma’s reign at the helm.

Well if one reads Michael Hudson’s book “Killing the Host”one would see the inevitability of the downward path the currently accepted economic system is charting. His contention that income derived from passive, non productive investments is contributing to a massive transfer of wealth away from over 90% of the population in favour of less than the richest 10% is unsustainable.
This grouping, which he calls the FIRE contingent, (Finance, Insurance and Real Estate sectors), are responsible for the massive move away from investment in the real economy of producing goods and services, towards that of non productive endeavour, where in the USA alone, accounts for 80% of loans being made to finance the trade in existing assets and financial services which in fact don’t produce anything new of value, eg financing existing real estate, corporate share buy-backs and other tradable assets, whith out any added productive input. This scenario plays out mainly as a contribution to price inflation, which then serves to “support” further rounds of deals of existing assets at further price increases.
In the process the economy becomes debt laden to a point where the FIRE raiders accumulate more and more of the pie, whist the debt burden of borrowers in the economy grows exponentially through the magic of compounding interest. This places an increasing burden on the ability of the financially indebted to the point where their disposable income, the true engine of the real economy, is compromised to a point where the financial establishment forecloses on real assets to settle debts which if they can’t be repaid never will be. The smoke and mirrors convention of including the FIRE contingents business activity in the national statistics, as part of GNP, instead of treating it as an overhead cost, masks the true position and as we well know, they will be hellbent on collecting what is “due” to them, come what may. The final scenario then becomes the attachment of any asset the debtor has been able to retain, which in the modern era of this fiasco, now applies to entire countries, of which Greece is a prime example, selling off national assets in the vain attempt to remain afloat. This die is cast in the uncontrolled manner in which money is created in a financial industry, where profit and growth is now wholly dependent on the expansion and new creation of debt. No effective discipline exists to align money creation with true productive activity in the real economy, where basically only a computerised book entry is needed to generate unsustainable money growth, which unfortunately doesn’t end up contributing to real economic growth, but results largely in price inflation. Mathematically and socially this model is unsustainable and needs true radical reformation. The evidence that we are witnessing a house of cards is there for all to see. Unfortunately the system is so opaque and devious, that countries populations are effectively kept in the dark without education or explanation. From such scenarios social unrest is born, when the “proverbial” hits the fan.

Solution please.

Look to China.

Individuals with an understanding of exact sciences need to decide on allocation of capital.

Well the first thing that could be done is to remove the rentier income paid to the financial sector (interest, charges and other “service income”, from the GNP figures and treat them as an overhead cost. Then, include only the income generated from real economical activity of producing new goods and “real services”.
This should help in monitoring real productivity across the economic spectrum, by eliminating the exponential overhead costs of financial costs.
Statistics then should be compiled reflecting the costs of true productive activity, movements in which could serve as a basis for money creation that reflects measurable levels of economic activity.
If properly constructed the idea would be to provide a disciplined method of measurement of money needed to reflect productive activity. As much as gold is criticised as a monetary base, one thing it did do was to apply a consistent discipline for money growth – it had to be mined, which reflected a basic productivity process. Nowadays money is produced at the whim of bankers pushing a keyboard button, with no real ability to control either the creation of money or predict its end use. The financial debacle of the toxic loan fiasco, developed by crooks in the US financial sector and supported by their banking institutions is ample evidence of the results of this lack of discipline. Currently this trend is well entrenched in global financial circles, underwritten by governments, global institutions like the World Bank and International Monetary Fund and the rise in global corporations, all of which are contributing in different ways to the unbridled expansion of global, national and individual debt levels, resulting in an concomitant explosion in money supplies. The combination of runaway money supply and exponential debt growth largely in the financial sphere is transferring capital away from true productive activity into “service” sectors and constraining funds from available

Frankpa that is a well versed civilized proposition, if done it could be a start to turn this system on its head.

I am afraid these actors are not that civilized and as history has shown only through abrupt disruptions will the financial elite relinquish their grip and power..

Best description here of a F$%^$ system and its members..>80% of $milionares in SA are from the financial sector.

And worst this creates ‘owners’ of capital under the illusion that they have some divine calling/ability for capital allocation and decision making.

Just to make your day Magnus, have a look at this old and probably damp infested, no garage house in St James where the sun goes down at 3.30 pm and the Main Road traffic is a nightmare. R7.5m!!! https://www.property24.com/for-sale/st-james/cape-town/western-cape/9039/105816350

Your usual sensible article on property … but Simon’s Town is still the best value for money in Cape Town. As long as you don’t have to work over the mountain.

If you bought property in 2007, you should not be investing in property, simply because by 2007 prices had risen by 200-300% from their 2001 lows.

I’m not fundi in the field but my experience has been good. Between my 3 townhouses and one free stand the performance has been great, probably because I’m cautious with my purchases.

Because of my caution;
– I steer clear of new developments, often I’ve found them overpriced & overdeveloped leaving little to enhance,
– Despite realtor’s hype I’ve never paid what the buyer wants, I pay what I am willing to and if the seller doesn’t like it there’s plenty more in the market. The trick is not to get sentimental about an investment, you can’t loose what you don’t have. So far this has worked well, a 2013 purchase I made in Bassonia for 820 is now 1.4 k; my most recent purchase (2016) was valued at 2.3 – 2.5k, my first offer was 800k less than that (ridiculous I know) and yet I got it after some negotiations and I believe it was a great deal. Couple that with further enhancements to make it self sustaining (AirBnB cottage, solar, rainwater harvesting etc) and I know it’s now worth a bit more.
– I’ve found old far much better than new, my 1978 property has proven to be far superior structurally than the ones built post 2000.
– My cautious nature dictates the rental market I play in is between 6k and 12k, works well because my tenants have proven dependable. In the worst case scenario should they not be I can find that money somewhere in my budget should they miss a month or 2, yes it’ll mean I drive the V8 less but still far much better than trying to plug a 20k hole.
– Townhouses/ estates have proven to be investments for my purposes. Because of space and ownership constraints a townhouse can’t be enhanced further to increase rental income. Free stand units on the other hand with ample space can be extended, additional units built etc; all this result in increased value and income.

With all that said there’s a bit of bad here and there but overall I can’t find any other investment that can return enough (with such low CAPEX & OPEX) for me to justify my *unnecessary* car purchases.

I would be interested to hear how many property investments worked out better than buying equity (such as Apple, Google, Amazon, Visa, Pricelinej over the last ten years.

Cheap transaction in, cheap transaction out, liquidity measured in seconds

What is ‘Robert in Sydney’s opinion on the topic? We value his opnion very much.

Why do I suspect we are about to get a property price adjustment very soon?

No buyers? Take a million or two rand off the asking price and you might have buyers. You can do a median value test, if you put the houses on the market for say negative R 2 mil (for clarity, you pay the buyer R 2 mil) you would have every person in the world trying to buy all at once. So between the points where there are no buyers and the point where there are unlimited buyers, there is a curve (which we guess has no holes in) where there are various numbers of buyers.

I suppose what you mean by “no buyers” is ‘fixed property is not very liquid, it’s more sort of, fixed, I guess’.

I won’t read through the comments this time but the sheer quantum amuses me. Good luck!

If you want to see what price the property sold for, do a simple deeds search, the transfer value (and historical ones) will be indicated.

Hi Magnus,

For as long as I have read your articles you have been bearish on property. I am not sure what has contributed to your bias, but I suspect your frame of reference has resulted in misguided advice. My own experience (and I am a Capteonian) has been anything but what you have described over the years, both in a personal capacity and as a property investor. Returns have far oustripped inflation (and the numbers you suggest above), and I am sure there are many others who have shared similar experiences to myself.

Owning property can be very profitable but is not for the fainthearted, especially in SA where rule of law is non-existant.
had my eye on a nice getaway on cape southern peninsula, but something (not money)stopped me from buying.
rates and taxes,staff issues , upkeep ,security and as the saying goes” hoe verder van jou goed hoe nader jou skade”.
not to mention all the nice places like Constantia, Noordhoek etc always seem to have the unwashed lot who move in nearby and live for free and the state eventually gives them services which they do’nt pay for.
so now i rent a lekka house , pay my money and after a few weeks hand the keys back

Fantastic article, well written, well researched.

Nice to have a reality check. I never realised till today that a lot of these so-called positive articles are borne from estate agents.

For me the Western Cape is working as well. Something that is not mentioned in the article is Airbnb, it can be a killer investment in the right location. But alas, the hectic world-wide PR that is created by the water problem in the Western Cape might just annihilate Airbnb as an investment as well, as Airbnb is about 90% to 95% + foreigners.

Let’s hope for the best!

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