Through the eyes of a professional property investor

Many experts believe 2009 will see interest rates drop by 2,5% from the current 15% to 12,5%. Whilst this does seem positive for the property market is it really going to help buyers, sellers and agents in 2009? I think not.

Let me explain.

To start off January 2009 sees the implementation of the revised CPI (Consumer Price Inflation). This should result in CPIX inflation dropping by close to 2% in 2009. It's amazing what a bit of government tweaking can achieve to change the outlook of our inflation.

This will start to give some relief but many South Africans will find that the reduction of interest rates in December 2008 will have been too little too late.

2009 will be, for most, the year to cut back and reduce debt. Property prices will continue to come under pressure with bank foreclosures and properties in possession reaching new highs. Those feeling the squeeze and believing that there might be light at the end of the tunnel: well, that's not the end of the tunnel but more like a train.

Advice for those feeling the pinch is that 2009 will be the year for getting out of bad debt at all costs. This will unfortunately probably mean selling that property that is strangling you financially for a discount and down-scaling and renting.

Expectations of property values need to be dropped. Many sellers will realise they need to sell for what they owe if they can. What's worse is that many will have to sell for less than they owe once they take agents commission into account via Acknowledgement of Debt agreements with their banks to pay back the shortfall. Having said that, if you don't need to sell now it would be wise to hold on for at least a couple of years before selling.

Unfortunately for many sellers the mass market will not be looking to be buying in ‘09. They will be waiting for some more certainty after the elections and in expectation of prices falling further so that they will pick up that same house cheaper in the future.  Yes, there will still be a small trade of property in the home-occupier buyer category with this probably led by the black emerging middle class. However, the other real drive for property buying will be from the property investor segment,who have been buying at large discounts since the beginning of the downturn.

With interest rates coming down these investors will be further ramping up their purchases in 2009 and onwards into 2010 from motivated sellers in the lower to middle end of the market. The major factor for these buyers will be financing as banks do not issue 100% bonds as regularly as they did in the boom years.

This has separated the speculators from the true property investors looking for long term investments. Those with cash and finance will buy like there is no tomorrow as the opportunities for buying properties with positive monthly cash-flow improve substantially and will continue to do so especially as interest rates decrease.

Creative financing techniques such as instalment sales in certain price brackets will increase, as well as sellers holding second mortgages over their properties in order for buyers to qualify will increase. Basically the seller becomes the bank for the balance not financed through a mortgage. This does require approval from the bank, however.

Many see the global credit crisis as deflationary, with commodity prices, stock markets, property etc loosing value due to de- leveraging. Others, like me, see the world as currently having a major going-out-of-business sale (liquidation sale) which is bringing prices down in the short term whilst these inventories are cleared. 

This is very different from deflation which is the reduction of the money supply.

However after the market has been cleared of indebted sellers and businesses, inflation will raise its ugly head again in the medium- to long-term. This will be the result of government stimulus which will result in inflation abroad and because SA imports more than we export and has a large current account deficit. This would result in any local investment debt purchased during these current doom-and-gloom times seem in the future as being bargains when the unavoidable global inflation hits us.

No doubt we are in for a bouncy ride both globally and in South Africa for the next couple of years. Cash will not be king as inflation will clearly erode savings.

Those who invest wisely in property and other investments with clear vision and objectives in these turbulent times will be handsomely rewarded. Those that are currently under strain are advised to sell now while interest rates are easing. The window for declining interest rates is small before they start increasing again as our reserve bank blindly continues to follow the global trend of inflation targeting, which clearly does not work.

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Brennan Carey is a full-time South African property investor who specialises in buying below market value properties(ibuyhouses@thenet.co.za).

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Those with cash and finance will buy like there is no tomorrow as the opportunities for buying properties with positive monthly cash-flow improve substantially

Brennan Carey

 

Comments

 

responses to this article

Youthful Exuberance People have a choice. Not everyone has to sell. Not everyone bought last year. Some mortgages or access bonds were taken out that were a fraction of valuation. A drop in interest rates will allow some heavily indebted households some breathing . .more space. They are unlikely to sell the house as they would still need to rent somewhere. This increases rental demand unless of course everyone decides to live with their in laws. Global crisis will see the return of temporary contract expats to SA. The continued infrastructure expansion in SA will see a continuing influx of foreign skills. Unlike the UK, incoming foreign expat workers into SA will not be housed in offshore barges. There may not be to many bargains to be had. Because its cheap does not mean its good value, because its expensive does not mean its overpriced. Good luck with your property business and your writing career. . .less by Tuscanite on January 30 2009, 14:31 Find this comment inappropriate? Report it

Problem is not so much the "value" of the mostly overpriced properties but the tight credit situation.Purchasers just do not get bonds. So it is a double whammy .The prop prices shot up not because of real demand but cheap credit.and people who bought overpriced . .more houses to show off. Chickens are now coming home. . .less by Goofy on January 30 2009, 15:52 Find this comment inappropriate? Report it

@Tuscanite All depends whetehr you keep your job doesn't it?! by JWise on January 30 2009, 15:52 Find this comment inappropriate? Report it

@Jwise What I have read to date seems to be that SA economy will not implode but be fairly stable. Business will take advantage to downsize staff under cover of "the troubles". If SA offer of help to rebuild Zim (not necessarily fund it) after Unity . .more Government iactually materializes then it will help expand business opportunities that create more jobs. Infrastructure development in Zim would attract Zim labour to return and SA manufacturing to uplift. Its early days but the revitalization of Zimbabwean economy could remove negative tensions created by the influx of refugees into SA and produce positive tensions in trying to meet demand for goods and services. The question is who funds it? Morgans mates with an eye to the future post-Mugabe? Be careful how much negativity you consume, it can affect your balanced constitution. . .less by Tuscanite on January 30 2009, 16:46 Find this comment inappropriate? Report it

@Tuscanite 1 Tuscanite by Brains on January 30 2009, 17:49 Find this comment inappropriate? Report it

@ tuscanite So ZIM is going to save the SA economy ? Now I have heard it all ! by wishful thinking on January 30 2009, 17:52 Find this comment inappropriate? Report it

No wishful thinking. I did not say Zim would save the SA economy, but it may contribute to many new business opportunities. You did not hear it, you read it. Eyes and ears are different. Normally I do not bother to explain that, but when dealing with the . .more terminally stupid every litte bit of rational thought process helps. . .less by Tuscanite on January 30 2009, 18:21 Find this comment inappropriate? Report it

@brennan I agree with your views on inflation and interest rates. It will make sense to do your sums at TODAYS interest rates and when rates drop 2.5 -3% FREEZE ones mortgage bonds for 5-10 years (some banks and SA homeloans allow this at approximately a 2% . .more premium over present interest rates). Then the rule of 72 works for you twice as hard. Cash flow positive today for Brennan type propertys with fixed rate means cash flow positive forever R2-3k subsidy today for Andrewa or Gem(?) type propertys with fixed rate means cash flow positive forever in 3-5 years with low risk. The worlds reserve bankers are trying to PRINT their way out of the sh!t which is good news for hard asset holders in general and property owners with fixed mortgage rates specifically. Hows your Yank Tank? . .less by andrewa on January 30 2009, 21:39 Find this comment inappropriate? Report it

At last one sane professional Excellent article. Good common sense in these times. Property is always a good investment at the right price. There are as the writer, professionals making good investments in property all the time. by ea on January 31 2009, 11:51 Find this comment inappropriate? Report it

Where do you find "cash flow positive" properties these days? And since when did "cash flow negative" stop them blowing the biggest bubble (property) of all time??? by I call bullshit!!! on January 31 2009, 17:11 Find this comment inappropriate? Report it

@ I call Speculators are currently been flushed from the market, these are the people that bought for capital growth and where not worried about negative cash flow. These days these buyers are VERY worried about negative cash flow and MANY other things too ! by investor on February 01 2009, 09:05 Find this comment inappropriate? Report it

@ Brennan If inflation targetting doesnt work what will work? Dont criticise without offering a solution by Black Middle Class on February 02 2009, 15:02 Find this comment inappropriate? Report it

@ BMC Cheap credit is what created this problem in the USA and around the world. Government intervention in the economy giving us artificially low interest rates is the problem. I vote for LESS government intervention as I am a capitalist. . .more Governments need to stay out of it. Reserve banks are to blame for the cheap credit over the last few years, their aim starting in the USA was to stimulate the world through a downward slump after the dot com bust and 911. It then filtered through to us. Let the free market decide what rates will be.. hows that for a capitalist solution? . .less by brennan on February 02 2009, 15:16 Find this comment inappropriate? Report it

Where do you find "cash flow positive" properties these days? Well we are going through a market crash these days so why is it not possible to think that there may be some people going bust? Just need to look carefully, you wont find them in the weekly glossy property in your area. by brennan on February 02 2009, 15:26 Find this comment inappropriate? Report it

http://webuy-houses.co.za http://webuy-houses.co.za by http://webuy-houses.co.za on December 01 2009, 15:55 Find this comment inappropriate? Report it

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