A
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Guest
BLAME the bankers. At least that’s the message I’m getting from Cape Town’s estate agents. We know asset prices have benefited from the increase in global liquidity but is it possible quantitative easing (QE) and zero or close-to-zero European and US interest rates are behind the sale of a penthouse at the Cape Town Waterfront for R100m? The answer is yes. Sort of.
Growth in the South African property market averaged around 10% last year. Although this figure already represents a fine return on investment, individual growth numbers differ wildly between cities. According to figures released by Absa, greater Johannesburg registered growth of 12% and Cape Town a staggering 17% for the year ended December. Figures for pockets in these metros are hard to confirm but anecdotal evidence (I called a few estate agents) suggests growth in some suburbs was 20%-25%.
Given the impressive returns we have seen on the JSE over the past year, largely a result of investors seeking high-yielding assets in a world of artificially low interest rates, it is tempting to assume the domestic property market has also been a beneficiary of easy money looking for a home but the links are not as clear as they might seem.
Erwin Rode, property economist at Rode & Associates, says there is a "tenuous link" between the rapid rise in domestic property prices and global liquidity: "We all suspect that the JSE has been driven by QE and overseas money looking for yield, what we don’t know is the degree to which the South African property market is integrated into global asset markets."
One of the reasons is that house prices are set by owner-occupiers, who do not buy on yield but arrive at a price by comparing the asking price with similar houses for sale in the neighbourhood.
About 90% of buyers fall in the buy-to-own category. The predominance of owner-occupiers explains why the income yield on residential property has historically been very low compared with commercial and industrial property. The result is that residential property in SA is expensive relative to commercial and industrial property.
Another factor that makes residential property expensive at present is the historically low interest rates, while commercial and industrial properties are not all that sensitive to interest rates. Thus, in theory at least, there are better investment options out there.
While I am happy to accept that foreign investors are not scouring the newspaper for three-bedroom listings in Plumstead, it is still possible that increased global liquidity has driven up property prices via the so-called "wealth effect".
In a nutshell, the theory is that a perceived increase in wealth makes people spend more. In other words, if your share portfolio has delivered returns way in excess of what your financial planner says you needed, you’re more likely to extend yourself on a bigger bond.
"It’s possible but very difficult to prove," says Rode, "but how else do you explain what is happening in Cape Town?"
As far as commercial and industrial property is concerned the link between quantitative easing and low interest rates is more direct. Rode says the price of commercial property has in part been supported by listed property funds, which are in turn part of the global search for yield. "The rate on listed funds is very good at the moment, so they can buy up anything they can lay their hands on."
Neil Stuart-Findlay, who heads Investec Asset Management’s listed property fund, says low interest rates have certainly helped support the demand for direct real estate assets, despite tough economic conditions locally.
"This is especially true in the retail sector, where dominant regional and superregional shopping centres — which tend to be defensive through an economic cycle — are highly sought-after at the moment."
Although the demand for property remains fairly robust on the relatively low cost of capital, Stuart-Findlay warns we can expect this to taper off in the medium term as global and domestic interest rates normalise.
So how do we explain the huge increase in residential house prices over the past two to three years?
In Cape Town, The Mountain and The Sea have a lot to do with it, and not just because it’s lovely to look at them. The city bowl and Atlantic seaboard are hemmed in by Table Mountain National Park and the Atlantic. This means the supply of properties close to the city centre is highly constrained, consequently prices are very high. The trouble is, if the price of property in the city bowl doesn’t kill you, the commute from the northern or southern suburbs probably will.
Cape Town is alleged to be the fifth most congested city in the world and commutes in from the north or south of the city can easily take upwards of an hour in the mornings and evenings.
This has seen an increase in prices in suburbs along the Western Seaboard, such as Milnerton and Table View, which have relatively easy access to the city via the MyCiTi bus routes, says Gerlinde Moser, owner and property broker at Remax Living in Cape Town.
Another factor that has influenced the rise in prices is an increase in the number of out-of-town buyers, Moser says. Although many European and American buyers have sold up in Cape Town, due to SA’s perceived political instability, and better holiday property prospects in Greece and Italy, there is a trend towards "semigration" from Johannesburg.
"We have seen a lot of families buy in Cape Town and the breadwinner commutes to Joburg during the week."
This, coupled with restricted supply, excellent public amenities, and an increase in buyers from the rest of Africa, has seen the top end of the market in the city bowl and surrounds grow by an almost unbelievable 1,500% in sales rand value over the past five years.
But by far the biggest driver of increased prices in the golden suburbs of Cape Town is bankers.
"All of my big buyers have suddenly become bankers. The top of Higgovale has become like a stockbroker’s belt at the moment."
Moser relates how last year a cottage in Oranjezicht that was sold for R3.2m was sold again six months later for R4.5m.
"It seems like some people have no idea where to put their money, so they put it in houses."
So you see, there is a direct link between quantitative easing and the rampant increase in housing prices — you just need to know where to look.
http://www.bdlive.co.za/opinion/columnists/2015/04/30/easy-money-does-it-for-the-cape
Growth in the South African property market averaged around 10% last year. Although this figure already represents a fine return on investment, individual growth numbers differ wildly between cities. According to figures released by Absa, greater Johannesburg registered growth of 12% and Cape Town a staggering 17% for the year ended December. Figures for pockets in these metros are hard to confirm but anecdotal evidence (I called a few estate agents) suggests growth in some suburbs was 20%-25%.
Given the impressive returns we have seen on the JSE over the past year, largely a result of investors seeking high-yielding assets in a world of artificially low interest rates, it is tempting to assume the domestic property market has also been a beneficiary of easy money looking for a home but the links are not as clear as they might seem.
Erwin Rode, property economist at Rode & Associates, says there is a "tenuous link" between the rapid rise in domestic property prices and global liquidity: "We all suspect that the JSE has been driven by QE and overseas money looking for yield, what we don’t know is the degree to which the South African property market is integrated into global asset markets."
One of the reasons is that house prices are set by owner-occupiers, who do not buy on yield but arrive at a price by comparing the asking price with similar houses for sale in the neighbourhood.
About 90% of buyers fall in the buy-to-own category. The predominance of owner-occupiers explains why the income yield on residential property has historically been very low compared with commercial and industrial property. The result is that residential property in SA is expensive relative to commercial and industrial property.
Another factor that makes residential property expensive at present is the historically low interest rates, while commercial and industrial properties are not all that sensitive to interest rates. Thus, in theory at least, there are better investment options out there.
While I am happy to accept that foreign investors are not scouring the newspaper for three-bedroom listings in Plumstead, it is still possible that increased global liquidity has driven up property prices via the so-called "wealth effect".
In a nutshell, the theory is that a perceived increase in wealth makes people spend more. In other words, if your share portfolio has delivered returns way in excess of what your financial planner says you needed, you’re more likely to extend yourself on a bigger bond.
"It’s possible but very difficult to prove," says Rode, "but how else do you explain what is happening in Cape Town?"
As far as commercial and industrial property is concerned the link between quantitative easing and low interest rates is more direct. Rode says the price of commercial property has in part been supported by listed property funds, which are in turn part of the global search for yield. "The rate on listed funds is very good at the moment, so they can buy up anything they can lay their hands on."
Neil Stuart-Findlay, who heads Investec Asset Management’s listed property fund, says low interest rates have certainly helped support the demand for direct real estate assets, despite tough economic conditions locally.
"This is especially true in the retail sector, where dominant regional and superregional shopping centres — which tend to be defensive through an economic cycle — are highly sought-after at the moment."
Although the demand for property remains fairly robust on the relatively low cost of capital, Stuart-Findlay warns we can expect this to taper off in the medium term as global and domestic interest rates normalise.
So how do we explain the huge increase in residential house prices over the past two to three years?
In Cape Town, The Mountain and The Sea have a lot to do with it, and not just because it’s lovely to look at them. The city bowl and Atlantic seaboard are hemmed in by Table Mountain National Park and the Atlantic. This means the supply of properties close to the city centre is highly constrained, consequently prices are very high. The trouble is, if the price of property in the city bowl doesn’t kill you, the commute from the northern or southern suburbs probably will.
Cape Town is alleged to be the fifth most congested city in the world and commutes in from the north or south of the city can easily take upwards of an hour in the mornings and evenings.
This has seen an increase in prices in suburbs along the Western Seaboard, such as Milnerton and Table View, which have relatively easy access to the city via the MyCiTi bus routes, says Gerlinde Moser, owner and property broker at Remax Living in Cape Town.
Another factor that has influenced the rise in prices is an increase in the number of out-of-town buyers, Moser says. Although many European and American buyers have sold up in Cape Town, due to SA’s perceived political instability, and better holiday property prospects in Greece and Italy, there is a trend towards "semigration" from Johannesburg.
"We have seen a lot of families buy in Cape Town and the breadwinner commutes to Joburg during the week."
This, coupled with restricted supply, excellent public amenities, and an increase in buyers from the rest of Africa, has seen the top end of the market in the city bowl and surrounds grow by an almost unbelievable 1,500% in sales rand value over the past five years.
But by far the biggest driver of increased prices in the golden suburbs of Cape Town is bankers.
"All of my big buyers have suddenly become bankers. The top of Higgovale has become like a stockbroker’s belt at the moment."
Moser relates how last year a cottage in Oranjezicht that was sold for R3.2m was sold again six months later for R4.5m.
"It seems like some people have no idea where to put their money, so they put it in houses."
So you see, there is a direct link between quantitative easing and the rampant increase in housing prices — you just need to know where to look.
http://www.bdlive.co.za/opinion/columnists/2015/04/30/easy-money-does-it-for-the-cape
