Property market is levelling off - as it should

Estate agents are known for their use of excessive language. An example is an estate agent describing a wreck of a place as "a rustic cottage that will be a handyman's dream".

So, it is hardly surprising that many of the spokespeople for the property industry are once again resorting to using excessive language to describe the current state of the property market.

Firstly, let's get one thing straight: there is no property market crash. The market is simply levelling off after three years of significant increases in value.

The property market is not in a slump. The statement that the property market is collapsing is in almost the same league as describing the recent stock market volatility as a bloodbath.

The reasons given in recent newspaper reports, which have quoted people who should know better, concerning the slowdown in property sales have included:

• The National Credit Act (NCA). This law, which took full effect on June 1, requires responsible lending practices from financial institutions. In other words, people who cannot afford the repayments on a mortgage bond cannot borrow money. All the new Act requires is that lending institutions apply careful checks on potential borrowers before lending them money.

Prior to the promulgation of the Act, banks too often did not really consider whether an applicant could afford the home loan repayments.

What the lenders did consider was whether they would be at risk of losing the money they lent to prospective homeowners.

There is a world of difference between a bank protecting its money and ensuring that you will be able to repay the loan.

Thousands of people default on home loans when interest rates go up. When there is repeated non-payment, the bank simply takes possession of the property and puts it up for auction, with the reserve selling price being what the bank is still owed. Very seldom do banks take any serious knocks.

One of the results of a spate of repossessions is that there is downward pressure on property prices.

So, while in the short term the Act may slow down sales, in the long term the new law should contribute to a reduction in the number of repossessions and to less volatile property prices in the future. This is a good thing. Those people in the property industry who are maligning the Act should think again.

• Rising interest rates. Interest rates mainly go up because people borrow too much money to buy things they want but do not necessarily need. The consequence is that we have too much money chasing too few goods, stimulating inflation.

The government does not like inflation because it affects things such as the value of the rand, which, in turn, makes imports more expensive. The South African Reserve Bank, which has an influential say about interest rates, is charged by government with the task of protecting the value of the rand, namely by keeping down the inflation rate.

The Reserve Bank's main weapon in taking on inflation is its ability to increase interest rates to discourage borrowing.

A large part in the rising price of property can be attributed to low interest rates. Easy money means greater demand for housing and, therefore, higher prices.

• No personal tax and transfer duty relief this year after a windfall reduction last year. This one is precious. Do the property people who have used this one think that Finance Minister Trevor Manuel should structure his budgets around the property market?

These factors are all what lawyers would call accessories after the fact. They are not the main cause of the slowdown in property sales. The main reason is simply that properties have become too expensive. Individuals cannot afford to pay the asking prices.

High prices
According to the Absa House Price survey, house prices rose by 20 percent a year between 2000 and 2006. I doubt there are many people whose income increased by more than 10 percent a year in this period.

So, it stands to reason that property prices had to reach a point where they became unaffordable. Things such as the NCA simply advanced the date at which this would happen.

The additional problems with costly properties are:

The point of all this is: the NCA may not be good for banks and estate agents, but it is good for consumers. It protects us against ourselves.

There is also a lesson for property speculators, particularly those who ignore the warning signs and join the fray when markets are peaking. This particularly worries me as the number of so-called property investments, such as high-risk property syndications, continue to be mis-sold on the basis of the recent historical house price growth, when prices have clearly run out of steam.

Investors will be well advised to steer clear of property syndications, particularly those where the structures do not give you actual part-ownership of the property. Advisers flogging these so-called investments are motivated by incentives of between six and 12 percent of the investment, often bringing total costs to more than 20 percent. You will be better off somewhere else.

You can negotiate your fees with banks
It is interesting that as soon as a law is passed limiting the maximum that may be charged, the top figure becomes the norm.

Recently, a senior official at the National Treasury objected to an increased administration fee on his Standard Bank home loan. This fee was almost five times more than the one charged in 2005 for another home loan with the bank and three times more than the fee charged on his other, bigger Absa home loan.

When the official objected, the bank provided the "inspired" answer that "this fee is a valid cost and these costs are provided for in the National Credit Act of 2005, section 100, point 1(C)". But the bank was "motivated" enough to say it would repay the fee for the past six months and pleaded with the official to stay "involved" by offering him a new banking package that would include a zero administration fee.

The issue is you can and should negotiate fees, particularly when they are maximums provided for in law.

(Persfin, October 20, 2007)

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