The Financial Gazette

property24.com

It certainly is interesting to see that many of the property predictions made at the beginning of 2010 have held true as the year unfolds.

So says Peter Gilmour, Chairman of RE/MAX of Southern Africa, who adds that as a case in point, the Property Trends to Watch in 2010, as detailed by the International Property Journal, predicted that in 2010 a “new normal” would become a reality for the global property market.
“Indeed, the market has not returned to ‘normal’ and it is unlikely that it ever will,” says Gilmour.
“For example, previously, low interest rates strongly correlated with consumer confidence and spending, and an upswing in property buying activity. While federal banks across the world have slashed interest rates, and in South Africa we are enjoying the lowest interest rates in 30 years, it has certainly not resulted in a boom of activity among property buyers.”
Another example is the tight credit lending criteria applied by the banks. “For many years, credit has been relatively easy to come by. Banks offered credit cards and loans via telemarketing, and bonds for 100 percent and even 110 percent were easily available. Given the shock waves that the subprime crisis sent around the world, as well as the implementation of stricter lending criteria across the banking sector and legislation such as the National Credit Act), easy credit and widely-available 110 percent bonds is a scenario we will not likely encounter again.”
Against the background of this new playing field, further predictions regarding the supremacy of cash, the lull in new developments, the ongoing oversupply of stock, and the tight rental market have also proven accurate.
Given the difficulty of obtaining bonds for property purchases, the steep deposit requirements and the necessity to have some savings to cover the additional costs of a property purchase, such as transfer fees, cash is now king in the property market.
Betterbond’s Dealmaker Dashboard shows that the banks’ decline ratio on home loan applications currently stands at 40 percent. This means that 40 percent of properties sold in South Africa today, must be sold again, because the prospective buyer could not obtain finance.
 “As such, buyers who have cash for a deposit, or at least enough savings to cover the additional property purchase costs – but particularly those buyers who can finance the entire property purchase with cash — have superior negotiating power. They can cherry-pick the best deals, and literally set the market price by what they are willing to pay,” says Gilmour.
This reality has also constricted the property development sector. “Off-plan, R.I.P.” is how the International Property Journal described the future of property development, noting that “the idea of free-rolling consumers buying blocks of condos in pre-construction is officially a thing of legend”.
“Any project counting on off-plan sales is clearly looking at a long, painful slog. New property development around the world, and in South Africa, has slowed dramatically as developers face a confluence of challenges: from difficulty to obtaining development finance to challenges in selling completed units.”
“Despite the lack of new development stock coming into the market, it has not – as would have been the case in previous years – seen the supply-demand equation tilt towards demand outstripping supply,” says Gilmour.
“The reason is simply that the existing supply of property continues to grow as ever more distressed properties come onto the market, and demand remains constrained by over-stretched household budgets that simply cannot meet the strict affordability and deposit criteria imposed by the banks, even as property prices have stabilsed and interest rates have reached a three-decade low.”
Gilmour adds that some banks are only now starting to work with estate agencies on the sale of their distressed properties. “It is expected that distressed property sales will be a reality for the next three to five years.”
Of course, he says, the constant flow of distressed properties will keep house price escalation in check for the foreseeable future.
Given the tight economic conditions and retrenchments that characterise the global markets, rentals have also not been boosted as would be “normally” expected under such a scenario. “In the past, when it was difficult for consumers to obtain finance due to high interest rates or tight economic conditions, the rental market would be boosted as many consumers were forced to rent,” notes Gilmour.
“Tenants are not only spoiled for choice given the oversupply of available rental properties — a result of a flurry of sectional title development and buy-to-let buying in the 2004-2005 boom times — but tenants are also more demanding and in a position to negotiate lower rentals with landlords who are keen to avoid vacancies.” — property24.com