Reuters
Reuters

Housing Market: Market heats up but not boiling yet

By Vernon Pillay Time of article published Sep 28, 2020

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Even with all the home buying activity that is going on at the moment, it is actually too early to say that the whole real estate market has swung around completely from what is termed a “buyers’ market” to a “sellers’ market”.

So says Gerhard Kotzé, MD of the RealNet estate agency group, who notes: “A buyers’ market is what you get when there are far more properties for sale than there are prospective buyers – or in economic terms, much more supply than demand. And when buyers have so many properties to choose from, there is usually also downward pressure on home prices, which was essentially the situation in South Africa right up until January this year, which is when the Reserve Bank started dropping interest rates.”

For the past few years, he says, many consumers were unable to buy property even if they wanted to, often because they had too much debt and too little income left over each month to be able to afford a bond repayment. “They were trapped by the rising prices for petrol, electricity and food happening at the same time that the economy was slowing down, unemployment was increasing and the value of the rand was falling.

“As a result there was a big oversupply of properties for sale, and while home prices were not actually falling, they were only rising very very slowly.

“Then came March and the Covid-19 pandemic, and the Reserve Bank started really slashing interest rates even more to try to keep the economy afloat. By May, the prime rate, which is also the base rate for home loans, had fallen from 9,75% to 7,25% and in July it fell to 7%.”

The effect of this, Kotzé says, was to reduce the repayment on a R1m home loan by more than R1700 a month, and suddenly, buying a home was a lot more affordable for a lot of people. “This was especially true for many first-time buyers who realized that a monthly bond repayment would now be about the same as the rent they were already paying, and jumped at the unusual opportunity that had been created for them to buy their own homes.

“Even during the lockdown, those who had jobs and were likely to stay employed – like all the essential services providers - started just flooding into the market and by July, bond originators like BetterBond were reporting that up to 70% of their new bond applications were coming from young, first-time buyers.

“Of course most of these buyers are active in the lower price ranges which are more affordable and where there is no transfer duty to worry about. And that is very good news for those who are selling homes for less than about R1,5m – and even better news for those selling for less than R800 000 – which is the sector of the market where we are now seeing a sellers’ market starting to develop.”

A true sellers’ market, he says, is exactly the opposite of a buyers’ market, with more prospective buyers than properties for sale – or more demand than supply. It also usually means that buyers have to compete for the properties that are available, and this puts sellers in a strong position to when it comes to negotiating, which ultimately puts upward pressure on prices.

“And we are definitely not at that stage yet across the whole market, because sales in the higher price categories typically take much longer to respond to interest rate movements.

“But we are moving towards it, and that is reflected in the latest statistics from FNB, which show:

  • That supply is still greater than demand but that the gap is narrowing as more and more homes are sold,
  • That the average difference between the listing or asking price of properties and the price at which they are actually sold has actually declined from 13% in the first quarter of this year to 12% now, and
  • That the average yearly rate at which home prices go up is currently rising at 1,4%, which is about double the rate at the beginning of the year.

“What is more, we think there are a few factors that will support this trend going forward and help it to spread to the higher price brackets, the first being that the Reserve Bank may well decide to lower rates even more later this year to try to stimulate the economy – a move which will prompt more upgrading and more investment buying on the part of repeat buyers.”

Secondly, says Kotzé, many people who were going to sell have now decided to keep their homes and withdrawn them from the market. “At the same time, there are remarkably few new home developments currently in the pipeline, so supply is likely to get even tighter.

“And if things do continue as at present, we believe we could be looking at a full-blown sellers’ market by this time next year.”

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