# General Business Category > Business Finance Forum >  Residential property rebound by 2010?

## Dave A

The South African residential property market will rebound by 2010, predicted real estate group Colliers International today.

The group said the prediction was based on the real estate clock, developed in 1933, which demonstrates the cycles and current state of the market and represents them as a clock face.

"The property market goes through cycles like any other and follows a pattern," said Sanett Uys director of Colliers International in South Africa.

"It cycles all the way from boom periods through contraction, recession, and falling values before beginning the upward swing in the cycle that includes uneven recovery, recovery, expansion, increased funding availability and back to a boom period," explained Uys.

The full cycle ranges from seven to nine years, each country and city has a cycle, and there are different sectors of the property market. The South African residential property market is under continuous pressure and in a state of deflation.

Uys noted that new mortgage loans granted continue to show year-on-year decline and the major financial institutions are predicting a 21 percent decline in the value of mortgage loans and re-advances for 2008.
full story from Business Report here

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## garthu

Following compliments of ABSA news (extract) - Don't sell this year if you can help it! And if you gotta, then do it soon. Supports the clock theory - it's stood the test of time!




> Economic outlook and prospects for the housing market in 2009
> Prime and mortgage interest rates are forecast to be cut by a cumulative 300 basis points during the course of 2009 to reach a level of 12,5% by year-end, mainly as a result of declining inflation during this period. Despite
> expectations of lower inflation and interest rates, economic conditions are expected to remain depressed for most of
> the year. Real economic growth of below 1% is projected for 2009, after estimated growth of around 3,0% in 2008.
> Growth in real fixed capital formation is expected to be barely positive this year, while growth in real final
> consumption expenditure by households will also be low compared to previous years, resulting from employment
> levels expected to come under further pressure and real household disposable income growth projected at only
> 1,5% in 2009, down from an estimated 2,7% in 2008.
> In view of these expectations on the economic front, the outlook for the residential property market in 2009 remains
> ...

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## garthu

This mans a genius... The banks don't have money... really   :EEK!: 




> The economic fundamentals in South Africa, says (taken out!!), cannot be blamed for the current situation. SARS, he says, should be congratulated for bringing the inflation rate down to 7,7%, a big reduction on the 11,8% rate of a few months ago and South Africans can be grateful that, with a few minor exceptions, he says, our banks have not been exposed to the First World's sub-prime funding. 
> 
> Why, therefore, can they not lend as before?
> 
> "The reason, it seems, is that the banks have had the ground cut from under their feet by the global financial collapse. This has made it impossible for them to access as much money as they need."
> 
> In many areas over 90% of the bonds applied for, says Neethling, are rejected despite agents and originators working hard to prepare them in an acceptable form.
> 
> Often, he believes, the rejections lack logic.


Known a very long time that NCA has very little to do with current bond rates..the banks won't openly admit it, but they just don't have the cash!

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## Dave A

That big international cash pull-out last year had to come from somewhere! Yep. Banks lend real money, just like when staff come to their employers for loans and advances.

The property boom was built on debt, our national savings habits are horrendous, and personally I was wondering where all the money was coming from given the low inflation rate. Now we have our answer. Lots of it must have been off-shore capital attracted to our relatively favourable interest rates.

I sincerely hope the banks are also factoring some breathing room for defaults (I suspect they are). We've got a pretty cautious, "risk-averse" crowd here.

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## Dave A

Some more forcasts, and some hard numbers showing the size of the drop-off.



> The residential property market is bottoming out, according to one of South Africa's biggest mortgage originators. 
> 
> But while another major originator also believes a recovery is imminent, residential property analysts maintain a turnaround is still a long way off.
> 
> Richard Gray, the chief executive of Bond Choice, said the volume of applications it had submitted to banks had increased each month this year. The bank approval rate had also improved.
> 
> Gray regarded the volume increase "as a sign the market has bottomed out". He said anecdotal evidence from estate agencies with which Bond Choice had relationships, numbering about 2 000, was that the market was not getting worse.
> 
> Bond Choice's volume of applications was about 55 percent lower than the peak in March 2007. It was between 65 percent and 70 percent down in terms of approved applications.
> full story from Business Report here


Quite a few other views in the article, for those interested.

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## garthu

You see my problem here is not that property could rebound, even if it rebounded hugely tomorrow, it's not going to help the buyers in general with the NCA and cash strapped banks.

I can say with confidence there has been an improvement in buyer activity probably lead by the decrease in rates and property price and also that economists suggest a turn around soon hence escalating property price again (be it minor for some time). Buyers I think are concerned that maybe the great deals may not be around one day and they have held out for a while

Now what i find interesting is that banks are improving there loans - now thats a load of crap. Weekly the banks change there lending criteria, it becomes generally stiffer, but changes all the time. The NCA has created an environment that all your credit and the way you handle it is becoming available in one place to view. Of the 10 odd new reports (data captured) i have seen (on rental clients), NOT ONE would qualify on a loan based on in a 2 year period they have defaulted for a month or 2 somewhere - the banks call this "bad profile" . Any one of us could make that mistake, pay your Vodacom/Edgars/ etc account late, maybe a dispute, maybe just forgot in error - that error reflects now for 2 years. As this system becomes more fine tuned and more data capture, it is going to make things worse.

The measuring stick for "getting better" i suggest has a few variables in it and i think is weighed on people who have large deposits in region of 20%  or higher that get bonds easily. People who have entry level deposits or no deposit (below 500K) have VERY little chance of getting a bond - since as we deal with low cost in tembisa, clayville etc as well, of the 10 last properties sold there, not one has got bond and there are certainly a couple there that should have.

I like there attempt at throwing positivity into the market arena - but taken holistically it's bull.




> residential property analysts maintain a turnaround is still a long way off.


. This is regrettably got more ground, buyer confidence will improve this year again, BUT can they get bond??

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## Dave A

Given the nature of my business, I tend to look at the numbers slightly differently. I'm not affected by value or pricing trends (except for the way it affects sensitivity to costs). My interest is in the number of deals, and based on those numbers, we're talking 30% to 35% of what was going on two years ago.

For an estate agent of course, it's a double whammy - Lower volumes *and* lower comms. But then in the good times that double whammy swings the other way, so maybe overall it balances out.

Bond originators must be miserable. They emerged during the good times and probably calculated their viability at the time. I wonder how viable bond origination is in the current market.

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## garthu

Bond originators are in serious trouble. There business has dropped considerably but are under threat of being closed altogether. There commissions were recently slashed by the banks (last month i think) and there is talk that banks might drop bond originators all together - this would be a blow to buyers, as the banks would be unforgiving with there rates ever to happen.




> Recent suggestions that bond originators no longer have a role to play in the residential property market are, in his view, way out of line, says Bill Rawson, Chairman of Rawson Properties. 
> 
> Reviewing the background to this issue, Rawson said that in âthe old daysâ the building societies charged fixed interest rates depending on the size and value of the bond.  Later, to capture strong clients, the banks began to give discounts on the interest raised in excess of 2% in some cases.  
> 
> âThese discounts began to cover as much as 20% of the interest that applied when the rates were lower and even today they are often in the region of 13%.â 
> 
> âInstead of attacking the supply channel surely this is where the banks should look to increase their profitability.â 
> 
> Previously, said Rawson, the banks had welcomed originators because, in doing much of the investigatory work, they saved the banks time and money.
> ...

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## IanF

> Bond originators are in serious trouble. There business has dropped considerably but are under threat of being closed altogether.


Last night a friend at the running club told us about being retrenched from a bond originator, he was there 13 years. 

Maybe they have to rethink the business model and charge the buyer for a service . Justifying this with the interest savings generated. Don't the insurance guys do something similar.

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## garthu

> 30% to 35% of what was going on two years ago


Am i reading that right? You are only doing a third of the business you were doing 2 years ago... thats pretty sad. Especially in light of that your service is often a necessity as opposed to splurging.  :Frown: 

On the bond side i just heard an Absa add on the road calling for bonds  :EEK!: , but directly to there own home loan consultant which they will send to you and the property straight away. They going to edge the originators out... so it begins!

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## Dave A

> Am i reading that right? You are only doing a third of the business you were doing 2 years ago...


The number is based on the approval numbers given in the article, but yep, there's been a *big* drop-off in that segment of our business. From my side the only way to shift the numbers is market share; I can't make *more* sales happen - although I did do a round of talks at the beginning of the year to "my agencies" to try to do just that. (Actually, looking at how we've gone so far this year, that might have worked  :Wink:  )

If it wasn't for the fact that I knew a correction had to happen sooner or later and had been building other market segments, I would have been in big trouble right now. And in saying I was kinda expecting it, I don't think *anyone* expected it to be as severe as it has been.

I've had to really get my hands in and run a tight ship through this.

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garthu (18-Apr-09)

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## garthu

Well huge credit for predicting and prepping for it. I thought i did as well, but as you say, didn't expect it to be as bad as it was! I amazed how it has effected your business as well - actually distraught!  :EEK!: 

Dont think anyone prepared for this - In October last year, there was a grand total of 6 sales (final sales) in sectional title between Vorna Valley, Halfway gardens, Noordwyk (which is most of Midrand res area). In a market of approx 30 agencies (probably not that high anymore), kinda makes market share REALLY important. As you say, cant make more sales... but market share...

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## Dave A

A bit of a bun fight here as to what is really happening with property prices. But this was my take-away bite:



> Residential property auctions grew in both value and number over the past year. Alliance Group has sold residential property worth more than R7 billion, largely distressed house sales, since last July.
> 
> Next month it would sell 750 properties compared with 40 last August. It expected to reach 1 000 sales a month by July and saw this continuing until the end of the year, Levitt said.


That's a lot more auctions!  :EEK!:

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## garthu

Now if i had really been prepared, I would have gone into auctions of property  :Slap:  Fact is we discussed with H/O, but discussion.... not enough .

Thats a frightening number and i tend to agree with the auctioneers side simply as in general, and most areas, are just completing sales due to the price. If a property is listed well below current average market price, it will sell quickly. Demand is there, no doubt, far more than we believe. Property via agents is still overpriced though and often either its what the seller wants or its the agent trying to do his best to get the best price (or just lying to get the mandate).

If advertised prices dropped by another 20%, market would flourish, simple supply demand balance come back into its own again. No one has the courage to say it though?? Not sure. The auctioneer is selling 750 per month versus, my one - do the maths, pretty simple as who's right. (Incidentally most of the auctioned properties in Midrand i have seen have sold 50-60% below a "fair" market value)

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Dave A (24-Apr-09)

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## Dave A

> Property via agents is still overpriced though and often either its what the seller wants or its the agent trying to do his best to get the best price (or just lying to get the mandate).
> 
> If advertised prices dropped by another 20%, market would flourish, simple supply demand balance come back into its own again.


That's exactly what I've been saying in my talk. What we are seeing is the result of trying to fight against the rules of supply and demand.

The spin angle is that property has held its price well despite the general downturn, which shows what a great investment property is!

The underlying reality is that there is huge resistance to lowering prices from the seller who is essentially over-committed with their bond. And that makes up the bulk of stock on the market at the moment.

The answer is for property professionals to accept that extremely low volumes means overpriced stock (which I think they have for some time already) and get *really* good at price counselling sellers. Because that is where the blockage is - or at least was until the finance raising problem came along.

But a pricing adjustment would probably help with the finance raising problem too.

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## garthu

Spot on!!  :Clap:

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## garthu

> It is beginning to be clear, says Tony Clarke, MD of the Rawson Properties Group, that a main reason why mortgage bonds are now so difficult to obtain is that certain banks are now simply refusing to accept bond applications from originators. 
> *
> Clarke said that he was recently told by a bank executive that that bank now believes the cost of applications through an originator to be too high.


Interesting comment, one i have mentioned before somewhere. There is a lot more to the article, but this didn't come as a surprise from what i have seen in the market

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## Darko

Do you know what percentages of homeloans granted were (say 1.5 yrs ago) originated through MO vs in-house? And is fo, does this drop-off equate to similar percentages?

I'm just trying (out of interest) to determine whether the originator is the reason behind this (or at least, most of the reason) or if it's something else.

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## garthu

Off the top of my head (so dont quote here please!!) i think 70% of approved loans were via MO, we would get around 70-80% overall approval in general.

Problem is at the moment these figures cant really be quoted as some MO only take deals they know will work and therefore get 70-80% whilst some take everything they do get and send through so around 25%.

What the banks are passing on there side on direct applications i have no idea at the moment but what i have seen is guys who have gone direct have been pretty successful, thats something we used to frown upon (we lose control over the transaction for various legal reasons), right now it could become frowning if they not prepared to go direct  :Confused: 

2 of the banks have made it pretty clear, without stating it (legal reason there i know of) that they will deal directly with the client, one of them will only look at current clients and not others.

Doesn't really give indication, but the signs are there

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## Dave A

> House prices are continuing to decline, due to a sizeable oversupply that has built up in the residential market, FNB said on Monday. 
> 
> Its latest house price index continued to decline in May to -11,3% year-on-year, it said in a statement.
> 
> This represented a deterioration on the revised -9,2% rate of year-on-year decline recorded for April.
> 
> It was also the sixth consecutive month of year-on-year decline in the house price index, FNB said.
> 
> On a month-on-month basis, the rate of deflation was minus three percent in May.
> ...


It's the first time I've felt these pricing trend figures are showing anything close to the pain that is actually being experienced in this market.

If you read the article, predictions are of worse property price figures to come. Why do they lag the actual trend like this?

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## Dave A

Property prices remain under pressure.



> A quick turnaround in the housing market was "improbable", Standard Bank said on Thursday as it released its latest Residential Property Gauge. 
> 
> "Standard Bank's property book for the first nine months of 2009 revealed an average monthly decline of 4,2% in the median house price. 
> 
> "This brings the number of monthly declines to 16 consecutive months," it said in a statement. 
> 
> The September smoothed (random fluctuations removed) data yielded a rate of contraction of 5,2% year-on-year, the same decline as in August. 
> 
> In real terms (inflation factored in), using its estimate of the CPI in September to deflate nominal house prices (inflation not accounted for), the decline in real house prices came to approximately 11,5%, Standard Bank said. 
> ...

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## Marq

> Middle-segment house prices were down by 3,4% year-on-year (y/y) to around R933 300 in August 2009 (-3,7% y/y in July and -3,8% y/y in May after revision). On a month-on-month basis, prices were up by a nominal 0,2% in August, after a marginal increase of 0,03% was recorded in July. In real terms, prices were down by 9,7% y/y in July this year, after declining by 10% y/y in June.


 - So says the absa man last month here




> The smoothed growth rate for September showed that the value of the median residential properties financed by Standard Bank was R550 000.


So what is the Standard bank actually saying.....
Smooth growth rate in a declining market?
They are only financing 60% of property values?
They don't agree with with absa's numbers?

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