The fact that I am writing this blog and you are engaged in reading it shows that we are still infatuated by property and real estate investment. You may think of it as an affliction, but it is in our nature to look for opportunities and try to employ our capital at the right time, when we are convinced that the market is turning for the better. And we know the turn is coming, but where is the bottom?
One of the things I like most about this asset class is the gentle turns the market makes. The curve runs pretty much in line with interest rate adjustments and property prices rise and fall, gracefully from bull to bear like a dancer in a ballet. When the tempo of the music changes we anticipate changes in the dance.
The last 18 months has given us change, almost from classical dance to Hip Hop, and we have seen house prices decline, and now commercial and industrial declines as leases run out, or tenants default. But the tempo of the music has changed and we now must anticipate how the dance will change, and when the curve will bounce back into the positive.
We have seen the interest rates cycle reaching the bottom as the reserve bank hold rates steady, a major indicator that we are at the bottom of the curve. Lightstone (who provide most house price data to the banks) announced that their House Price index, which tracks “repeat sale” house prices, shows that house price inflation is up in February. They suggest monthly inflation for all segments is heading upwards with some segments showing a sharp increase in monthly inflation. Find details on www.lightstone.co.za
But is this dead cat bounce or is the real deal?
Let’s consider the other major drivers of house prices. DEMAND - The more buyers there are looking for property the more sellers can ask for the property. But we know the banks had the taps closed tight, and were not lending to average purchasers. Whatever they say, you can see the latest mortgage advances data released shows that year-on-year growth in mortgage advances slowed down to 9,4% in May - the lowest since September 2000. But it seems the brakes are coming off. Richard Gray, CEO of the second biggest mortgage originator BondChoice, claims they have seen an increase of 15% in sales volumes from May to June. He says Standard Bank are making “positive noises” about returning to the origination market and FNB have relaxed its credit criteria in the last few days making it easier for buyers to obtain a loan. This will undoubtedly add buyers to the pot. Estate Agents advertising on Private Property also indicated they had improved figures for June, with houses that were sitting on their books finally selling.
SUPPLY – The amount of stock on the market is relevant. While there are still developers with unsold inventory, we see that the volume of new house plans submitted has dropped by 50% so we know there is not much new stock coming to market. Other urgent sellers would be the banks selling off houses that they would have had to foreclose on, and although this could be a wild card, the volume of Properties in Possession of the banks is not increasing significantly.
By all accounts it seems that the dance has changed, and the only question is will it stay flat, and how quickly will it turn Bullish.