The recent 75 basis points increase in interest rates is not likely to be the last this year as South Africa is forced to follow interest rates in the United States.
A similar increase can be expected by the end of the year.
The reason South Africa needs to follow this overseas trend is that unless we match these increases, the rand value will plummet.
The SA currency is trading at over R18 to the US dollar compared to less than R15 only a few months ago.
Presently, investors are not encouraged to invest in South Africa because of its corrupt government and major electricity problems.
The lack of progress on bringing to trial hundreds of seriously corrupt officials that have been identified in the Zondo commission does nothing to help the situation.
On top of this, complicated and invasive legislation is making doing business in and with South Africa less and less attractive.
The South African property market has experienced a very long period of low interest rates last seen in the mid-1970s but in a very different type of market.
In 1975 bonds were obtained mainly from building societies which were savings institutions, the accumulated funds of which were invested in secure long-term home loans.
By secure I mean that buyers of homes always had to make a substantial deposit of at least 20 percent but normally 30 percent before a loan would be granted.
The 100 percent loans we see today were unheard of.
This meant that the risk on loans being defaulted on was low for building societies.
The restriction of this type of lending was that building societies could only lend the accumulated income that they received from investors.
This was a serious block to the development of new homes.
I recall long waiting lists for funds and that available funds were well below demand.
Additional funding had to be found outside the building societies and large amounts were sourced on the stock exchange for five-year fixed deposits in the building society, these funds being specifically directed towards bonds designated by the estate agency that had sourced the funds.
There was a cash premium that had to be paid to have these funds put into these long-term fixed deposit accounts amounting to six-seven percent.
In the 1980s, banks came into the market with a more liberal lending attitude, whereas the building societies tended to keep interest rates stagnant irrespective of the amount of money available banks used interest rates to regulate the amount of money available.
In simple terms, if there was a boom in the housing market and a bigger demand for bonds, banks raised interest rates to attract more investment money, which also tended to reduce demand which tended to level supply/demand.
In the early 1980s, there was a massive boom in the gold price from $35 to $800 per ounce when there was so much money around that property prices rose hugely.
I recall that a unit at Naval View rose from R65 000 to R125 000 in a single year.
When the gold price crashed to around $400 an ounce, those property prices dropped like a stone to around the R85 000.
Interest rates rose to 25.5 percent at one time.
While everyone was crying, those that bought at the original price did not have a problem as they could still sell at a profit, but those who bought at top prices surely did.
Many people were paying around R1 000 per month (equivalent to R5 000 today) on their bonds.
However, the quicker and higher the rise, the quicker and bigger the rates dropped to around 18 percent for many years and the market improved.
To come back to my original point, we are in a rising interest rate market and, in my opinion, another one percent to go.
Interest rates have nearly doubled in a year.
What was a good investment a year ago might not seem to be quite so rosy now.
Many people are now pushed to sell what they bought recently.
Prices are determined by demand.
There is less demand now than there was a year ago, so logically prices should be less too.
From national data we are seeing that on average prices have continued to rise though much more slowly with about 0.75 percent increase overall.
As there must be areas of high demand high prices and areas of low demand low prices, this average is not true for everywhere.
It is interesting to see that an area such as Dan Pienaar, which was voted the most desirable suburb in the country a few years ago, is seeing a very high rate of new “For Sale” listings in the price range of R2.3-R3.3 million.
The volume of listings is far higher than for other suburbs in the city.
It shows that buyers in that suburb in particular are under pressure from the current rates.
I would suggest the current buyers in that price range may be finding Dan Pienaar houses a little on the old side and less ecologically friendly than small but more modern homes in areas such as Wild Olive and Somerton, especially when you take security into account.
Sellers need advice from competent estate agents to help them in pricing their home properly.
If the agent or home owner prices the property above the market level that home will stay on the market far longer.
Buyers are very price savvy. They see lots of homes.
Not only do they buy the type of property that suits them best but they buy the best of a small choice of suitable properties that is the best (cheapest) cost to them.
Thus, over-priced properties get stale while they sit on the market.
More importantly, estate agents are only human and will tend to choose the best value for money for their clients.
Those properties will be shown first and the buyer will seldom reach the buyer at all when they decide to buy the well valued property first.
In any area there is a range of prices of homes that are sold.
Typically, in the area that I live in in Southern Bayswater prices range from R1.3 to R2.2 million.
Why the range in prices?
It depends on a multitude of factors but essentially size of building and grounds, position of the property, orientation ie north facing or south facing, facilities offered and condition of the property.
A small really modern, well-looked-after house may well get a better price than a big neglected one.
Also to be taken into account are the circumstances of the sale.
A deceased sale for example is recorded as a sale for no value – a sale for R800 000 is quite likely to be a 50 percent share transferred from husband to wife in a divorce.
A professional estate agent will know their area well and be able to compare these different properties and make a judgment where the property being offered for sale fits in to the range of prices.
Unfortunately, with the current increases in prices, the sales record for the past year may be on the high side with more sellers and fewer buyers indicating a stability or slight turn down in the prices that buyers would be willing to pay.
There is not doubt that homeowners who place their property on to the market at high prices are likely to struggle to get their properties sold.
- Mike Spencer is the founder of Platinum Global, a professional associated property valuer and consultant with work across the country as well as Eastern Europe and Australia. mike@platinumglobal.co.za