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Monday Feb 23, 2015

Stocks shrink as more people stay put

There are serious stock shortages in the South African property market says Lanice Steward of Knight Frank Residential SA.

This could be because of a number of reasons, she says.

"The first could be the high cost of moving. Transfer fees on a home come to about 8 percent of the purchase price, which means that buyers need an extra R80 000 for every million rand the home is worth. In addition to this there are many other costs in moving home, such as the cost of minor renovations and repairs to the property, curtains or blinds, the moving company, transfer of items like telephone and ADSL lines, and a host of other items that must be added to the overall budget of moving to a new home.

"Many home owners prefer to take the R400 000 that would be spent in various costs on a R5m home, for instance, and put it towards a major renovation of their existing property instead of moving house, which makes financial sense.

"This trend is patently obvious when you drive around areas like Camps Bay, Rondebosch, Sea Point and Claremont, where continual upgrading is taking place."

This is confirmed by John Loos in the FNB Property Barometer report on residential maintenance and upgrades. He says the percentage of home owners undertaking "value add" renovations has risen from 10.5 percent in the first two quarters of last year to 15.5 percent in the last two quarters. This percentage has risen steadily from the low of 3 percent of total home owners in the first half of 2013.

The second contributor to the shortage of stock is that many potential buyers cannot get the finance they need. More and more people are working as freelancers or contract workers from home, and they find it very difficult to qualify for finance. In addition, the requirements for applying are irksome and time-consuming, says Steward.

"Self-employed people need to produce two years of audited financial statements as well as bank statements. The lack of growth in the economy over the past few years has translated into lower salary increases and fewer bonuses, which in the financial sector in boom times were huge sums of money. People tend to have to work harder for their money at present, and higher household expenses have made it more difficult for people to upgrade and sell, but better for them to stay put.

"If a home is near good schools, the ease of getting children to and from school and being in the school's catchment area has made it all the more important to remain in an area at least until children leave school. In the past there was a sevenyear cycle of people moving in and then selling to upgrade or move area but this cycle has now increased to 13 years, which means less stock available to sell."

She says another factor contributing to the dire stock shortages is an increase in people buying to let, looking in the long term to grow their wealth and income stream for retirement, which then takes homes that may have been for sale and places them in a renting category.

"Although this does help those who need to rent because they cannot get mortgage finance, it exacerbates the shortage of stock.

"A decrease in the number of people downscaling due to financial pressure - which was prevalent in the last few years - has also contributed to the lack of stock being fed into the market."

This category has been added to by older home owners also holding back on their downscaling and a new trend forming where their children move in with them and build a "granny flat" on the premises for the older couple to live in.

"The stock shortage has resulted in properties reaching higher prices than they did a year ago. However, it is not a sound reason for sellers to overprice their properties.

"Overpriced properties stay on the market for a long time. They are stigmatised and sellers may have to settle for far less in the end," she says.

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