Fundamental outlook for residential real estate

The rising cost of living and coincident decline in the standard of living, isn’t reflected by the CPI.  The cost of maintaining your current standard of living way outstrips CPI inflation, and will be a silent assassin of the residential real estate market.

As the cost of living ratchets higher in coming years, the price of property is going to be linked to this on the inverse, meaning the affordability of real estate in real terms will come down to offset the higher cost of living. With households already in debt to the tune of 80% of disposable income, there is little propensity to take on more debt.  The SARB’s monetary transmission is broken and they will moan about this in years ahead as they struggle to get people to borrow money. To avoid price declines in real estate in Rand terms, the SARB will likely try to weaken the currency, which will also have the impact of enticing people to borrow.  

The marginal buyer of residential real estate is a low income household taking on leverage of at least 10:1, most of the time more. Just about everyone who can afford to own, already own at least one property. Rapidly rising interest rates 2 to 3 years out will see this marginal buyer bow out as his/her ability to service debt is wiped out by the significantly increased cost of living.  This excludes the impact that baby boomers liquidating second and third homes to bolster retirement funds will have on the fundamentals of real estate.

Homes on the edge

Pam Golding Properties*

25 June 2010

Rising running costs are putting homes at risk. As retirement incomes fail to match up, pensioners are desperately seeking ways of keeping their heads – and homes – above water.

Although there has been a noticeable drop in home repossessions, financial stress remains a negative force in the residential housing market. A growing problem is that of retired people, pensioners and those on fixed incomes being increasingly incapable of meeting everyday living expenses.

Most no longer have mortgage bonds to repay but the rising affordability factor is getting out of hand. For those still with a bond, it’s even worse. Administered prices are the main culprit, but general household expenses are rising well beyond the official consumer inflation figures. Electricity charges are the villain of the month, but to some extent these can be contained by cutting back. The real killer is the inexorable rise in municipal charges, rates in particular.

Many retired people are being forced to put their homes on the market. Scaling down makes practical sense, if they can get a decent price, but there is an emotional side to the issue. And if they can’t find a buyer and can’t pay their rates they may well find themselves out on the street anyway.

Most of us have been made aware of the fact that according to the investment/retirement industry only five percent of the population will be able to retire in relative comfort. Consumers are constantly slapped on the wrist for poor retirement planning and the lack of a savings culture. The fact is that most people battle to pay their basic bills.

But it is scary! Inflation and interest rates and their effect on returns are the culprits. Moreover, life expectancy rates have risen dramatically while “retirement age” norms have hardly moved.

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More property shocks

Pam Golding*

28 June 2010

After Eskom takes its whack of the next electricity tariff hike, municipalities take yet another bite.

One of the more worrying aspects about our stratospheric domestic electricity costs is the compounding effect of municipal distribution. Those few urban communities still supplied directly by Eskom can thank their lucky stars that they are still being supplied by the country’s source generator – if the word “thank” can ever again be used when referring to Eskom.

Municipalities make a tidy profit in selling electrical power to their communities. But the power they buy in bulk from Eskom is also used in most cases to run their own buildings, street lights, traffic signals and underground pump systems – for which they themselves don’t pay and which consumers thought they were funding through their household rates.

The so-called “hidden” charges pump up the end-users costs and are a subject of considerable anger. For example, there is a service charge and there is VAT at 14%. Then there is VAT on the service charge. My own experience in Cape Town, where I live, is that this service charge varies when I buy electricity for my meter and yet the council says that the service fee is a daily fee and works out to be the same whether your buy once a week, once a month, or once a year (by the way, once you’ve got a prepaid meter you’re not allowed to go back to getting a bill). And why VAT at all on what is simply a fuel? There’s no VAT on petrol or diesel.

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