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Friday Mar 30, 2012

John Loos shares views on property prospects

Since holding a networking breakfast some three weeks ago, Dianne Brock, manager of the Western Cape Institute of Estate Agents of South Africa (IEASA), has received numerous requests to summarise the residential property update given by John Loos, the FNB economist, at the breakfast.

"Many people," said Brock, "are looking for signs of an upturn or, at least, for an authoritative analysis of the current trends. John Loos enabled us to take a balanced long-term view of the current situation. He does not yet predict an upturn within the near future, but his overall view remains optimistic."

ABSA's real growth house price graph for 1966 to 2008, said Loos, had shown some remarkable fluctuations but a similar graph produced from figures gathered by FNB from 1995 to 2010 indicates clearly that the trend is still upwards - from an average house price close to R350 000 in 1995 to a level of close to R800 000 in 2010.

"One must, however, bear in mind the changes in the properties themselves," said Brock, "when looking at property figures in the long term. Homes built in 1966 cannot be compared with those built in 2011. Comparing the home and plot sizes it becomes clear that today's offerings are significantly smaller."

Loos, she said, had shown that there is almost no likelihood of an upward movement in real terms on housing prices in the coming twelve months.

Considerable time was spent by Loos discussing the much publicised statement from housing analyst Erwin Rode to the effect that SA house prices are 25% overvalued.

"Loos was adamant," said Brock, "that it is just not possible to quantify the extent to which housing is 'overvalued' but he indicated that in his view the 25% estimate was excessive, especially now that prices are moving up in cash terms."

Discussing the current difficult trading conditions, Loos showed that for much of the time the present government has been in power, infrastructural spending by the State, now 0,5% of GDP, was nowhere near the 4% that had been the norm from the late 1950s to the early 1970s. This cutback, although fiscally wise, had impacted on the economy as a whole.

"With a lack of good public transport and with a higher cost of fuel, the people have begun to move closer to their work places. Smaller, denser housing schemes, with increased security are already proliferating in and around main business hubs.

The good news as revealed in the latest budget, said Brock, is that the State infrastructural spending will now increase and help remedy this situation.

The lack of developed urban land, Loos said, had been exacerbated by a huge shift by the rural population to the cities. These now house almost 60% of South Africans as compared to 46% in 1960. In the circumstances, faced with higher land and house prices South Africans have had continuously to downscale both the size of their homes and their plots and have increasingly moved to sectional title homes. Loos showed several graphs on this subject, one of which revealed that large homes are rapidly giving way to smaller homes. Only 7,4% of houses built recently have had four bedrooms and only 3,1% have five bedrooms.

Loos then, said Brock, looked at the global economy and how it inevitably impacts on South Africa and housing prices. With the World Bank predicting global growth of only 2,5% and with the IMF about to downgrade from their previous 4% forecast, South Africans; said Loos, cannot now expect more than the 2,8% growth predicted by the SA Reserve Bank for this year.

This in turn, he said, probably means that house price growth will remain at its current low levels. Average selling times, said Loos, are now 17 weeks and 6 days which again is an improvement on the longer periods of 2008, 2009 and 2011 but is still too long. In these conditions, said Loos, there is pressure on the banks to ease up on lending criteria.

However, said Loos, FNB and other banks are concerned that the 75% household debt (in relation to GDP), although an improvement, is still far too high for what is in fact still an emerging economy. They have no wish to increase their risk and to broaden the problems through irresponsible lending: the global economy is still in "high risk mode" and there is considerable uncertainty as to whether Europe and the USA will emerge from their current difficulties.

Reflecting these uncertainties, estate agency activity ratings, said Loos, have been significantly low. The current problems have led to a big drop in sales since the highs of the first quarter of 2010. In his opinion, the only way in which an estate agency can now grow turnover is by capturing a bigger market share. They should also, he said, encourage potential homeowners to make use of the banks' growing willingness to engage in non-mortgage lending.

"With consumer price inflation now around 6,1% the household debt figure is still likely to increase," said Loos, "and the banks have to see the broader picture and act accordingly."

Loos, added Brock, concluded his presentation by saying that estate agents have often failed in the prime business lesson of putting the client first. They have, he believes, often neglected to build long term client relationships. (Despite property selling and buying being only an occasional activity, the building of long term relationships, he believes, is very definitely possible and essential.)

Loos concluded his talk by asking estate agents two questions:

"Are you at the top of the client's mind when he needs property advice or information?" and "Is your personal brand as strong as that of the agency you represent?"

"It became clear to us," said Brock, "that Loos is challenging us to give higher levels of service and to try to put the client's welfare before any thought of personal profit."

Western Cape Institute of Estate Agents Press Release


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