1. Property Market
2. Housing Market Indicators
3. Spotting a “Serious” Seller
4. Life Insurance vs Funeral Policies
5. Stack the Odds In Your Favour
6. Becoming a Millionaire
7. Thought for the Month
Some people may say that, after a boom of such extreme magnitudes as the one of 1999 to around 2005, and very respectable house price inflation rates albeit slowing in 2005 and 2006, I must be absolutely crazy to suggest that there could be a house price inflation recovery as soon as 2008.
What keeps me bullish regarding the rest of the decade's housing market performance then? One simple word - SCARCITY.
Whereas new house price inflation was predominantly "demand-pull" inflation during the main boom years, it would appear to be starting to revert to "cost-push" inflation, and that "cost-push" is becoming very strong.
This is apparent in Industry Insight's Residential Building Cost Index, which measures residential building contractor pricing. The most recent inflation rate was 23.3% year-on-year in October 2006. This is a major increase from 0.8% as at December 2005. The meteoric rise goes hand-in-hand with a sharp rise in building material inflation from 4.6% as at January 2006 to 14.7% as at November 2006, while skills and some related services are also reported to be in short supply.
The sharp rise in building cost inflation, ironically, comes at a time when residential building activity growth is subsiding steadily. Year-on-year growth in residential buildings completed (number of units) was negative to the tune of - 6.5% year-on-year for the 3 month period to November 2006.
Normally, one would expect that in times of weak demand for residential units, and thus slowing supply of new stock, building cost inflation would be on the low side.
The lesson we are beginning to learn is that you analyse residential property in isolation from commercial property and infrastructure development at you peril. They all hang together in these times of higher economic growth because they are all competing to a greater or lesser extent for increasingly scarce skills and materials.
This is reflected by overall real construction sector value added growth of 14.3% at a quarter-on-quarter annualised rate in Q3 2006, and similar growth in prior quarters. This growth is the combination of still significant residential building activity, increasing commercial property building activity, proliferating government infrastructure projects, and perhaps the early stages of some 2010 preparations.
With commercial property vacancies having declined over a few years, and with industrial space especially tough to acquire in most of the major centres, a frantic pace of development of new space will be required to match demand.
Rental inflation in both office and industrial space has been accelerating, and high double digit inflation rates are becoming the order of the day in many areas.
With commercial property returns impressive (30.1% in 2005 according to IPD and possibly equally impressive or better in 2006), the residential property sector will have its work cut out in competing for many of the scarce resources needed for new development, and this could play a key role in limiting the supply of new residential stock.
But a sharp rise in building cost inflation over the next few years is only one (albeit important) piece of the jigsaw puzzle. The other factor is the economy. Real economic growth appears to have shifted up a gear in recent years, into the 4-5% range.
Solid economic growth by SA's historic standards implies more rapid growth of overall household disposable income, a more rapid growth rate in middle class numbers, and all this leads to more rapid growth in housing demand. More rapid economic growth also places huge demands on infrastructure, which is the reason why the construction sector is booming the way it is.
Over the rest of the decade, it is this combination of more rapid housing demand growth coupled with sharply rising building cost inflation and limits on growth in new housing stock that is key to a relatively bullish picture on the housing market.
It will be a different kind of growth to the boom years that have passed and a little less extreme. Whereas the main boom years were driven by extreme demand growth as a result of interest rates dropping from a peak of 25.5% prime late in 1998 to 10.5% by 2005, the expected strengthening from 2008 will be driven more by the combination of solid economic growth and growing constraints in housing supply, with interest rate reductions being very small in magnitude and thus playing a small role.
The 2010 World Cup will indeed play a role, but this role must not be exaggerated. It is unlikely that masses of individuals will drive up residential property prices by purchasing houses with the sole aim of making money from football supporter tenants over the one month world cup period.
Rather, the impact of the World Cup will be experienced via the further pressure that it exerts on the construction sector. A good number of billion rands' worth of stadiums and related infrastructure need to be built over the next few years.
Furthermore, certain government-led infrastructure projects that would have taken place regardless of 2010 will be fast tracked for completion for 2010, either because they are required for the event of because of the positive impact they may have on SA's image, creating a further construction industry "crunch".
2010 will also impact positively on the economy. Apart from a short spike
in economic growth caused by a massive influx of spectators and officials
for the World Cup, the event will greatly boost SA's image as a place
with good infrastructure, good organisational skills, and a great functions
and events destination. We have already some time been on a path of building
such an image with the hosting of other sporting world cups, African Nations
Cup soccer, and major global conferences (e.g. earth summit) at very fine
convention centres that have sprung up. But the world cup is another step
up for the "events industry" and is arguably second only to
the Olympics, with billions of people watching on TV.
So, while the direct net benefits of a world cup are always debatable,
I believe that SA will gain hugely in terms of its image, which has often
been held back purely by the fact that the country is on the African continent.
Such image benefits can translate into better economic growth in the ensuing years than would otherwise have been the case, but that is a period post-2010 rather than prior.
For now, therefore, the benefits of the World Cup in terms of house price are expected to come predominantly from the added constraints that it will place on the construction sector.
The final source of price pressure will come from increasing land scarcity around major metros especially. Not only are metros beginning to place limits on unbridled urban sprawl, but the authorities are also unintentionally restricting urban sprawl by being unable to keep up with the demand for new infrastructure, the most important arguably being transport infrastructure. Increasing traffic congestion accompanied by limited new road development makes it tough to just develop new residential property further and further away from business nodes. Watch housing prices around Sandton, for example, soar in years to come as traffic congestion gets worse and many high income people try to live closer and closer to work. Watch top quality schools becoming key drivers of house price inflation in their vicinity, as many choose to live closer so as to avoid a 1-hour commute in each direction merely to drop their children off. Then there will be another group "fleeing" the chaos of the cities to smaller towns not too far away from the city, where infrastructure is less under pressure.
Acknowledged, residential property price inflation remains on a declining path for the time being. But looking at the longer term, and given the combination of mounting land and construction supply constraints, caused by more impressive economic growth than we've had in decades and exacerbated by 2010, the longer term performance looks to be bright, perhaps not for those trying to acquire property, but from a point of view of those that will own it..
Housing Market Indicators - Gina Schoeman
Just as James Bond makes a comeback in our cinemas year after year, so will the inevitable cycle of the South African housing market in our economy. What exactly lies behind the interminable cycle of a property market? How does one make sense of the many macroeconomic indicators that headline the front pages of our favourite newspapers and news channels? And finally, how can these major indicators assist you in making sense of the housing market?
Now, I'm no cocktail connoisseur, but just like a good martini, knowing the correct measurements and how to combine the major ingredients is crucial in understanding the flavour of the drink. And similar to our housing market, getting to know the measurements and combinations of some of the major macroeconomic indicators is fundamental to the flavour of the future property market.
Although it is a well-known fact that the prime interest rate has been
a major driver of the property market over the past few years, this is
mainly due to the fact that it declined considerably in a relatively short
period. With the interest rate environment now sitting on a relatively
stable path, and forecasted to remain relatively stable going forward,
the property market cannot depend on another large decline in interest
rates to drive growth upward. For this reason, GDP growth averaging between
4% and 5% is a more sustainable driver for long-term growth in the future.
Four popular indicators that influence GDP growth and the housing market
have been chosen for the purpose of this article, and for no other reason
than the fact that they are so commonplace in our everyday lives:
1. CPIX
2. Private Sector Credit Extension (PSCE)
3. The Rand/Dollar Exchange Rate
4. Brent Crude Oil Price
CPIX (best known as consumer price inflation which excludes the effect
of mortgages) essentially measures how quickly prices of consumer goods
are increasing. The South African Monetary Policy Committee follows an
inflation-targeting regime whereby the Repo rate is used as a mechanism
in order to maintain CPIX between a target of 3% and 6%. As a result,
when CPIX is seen to be creeping up to the 6% ceiling (in other words,
prices are increasing in response to increasing consumer demand) the MPC
may be inclined to increase the Repo rate in order to slow consumer spending,
as a higher interest rate translates into higher debt repayment. The CPIX
was reported at the 5% level (year-on-year) in December 2006 and its future
path is forecasted to be relatively stable.
PSCE measures the level of credit extension in South Africa; in other words, the rate at which individuals are taking on more credit into their personal portfolios. Currently, year-on-year growth in PSCE sits at 25.8% for December 2006 and, although lower than previous months, this rate is desired to decrease even further as it indicates a higher-than-desired take-up of credit. The danger of high credit extension lies in the fact that should the Repo rate need to be increased in order to maintain inflation, this will harm the health of consumer's ability to spend, due to their already over-extended portfolios. The tricky bit here is that in order to fuel GDP growth, the economy requires that consumer spending remain healthy and robust, however, not to the point whereby individuals become overly indebted.
Taking two steps back, it can be seen that consumer spending affects CPIX, which in turn influences the prime interest rate. At the same time, PSCE affects the level of credit which in turn, affects inflation, and thus the MPC's decision on the prime rate. However, a healthy level of consumer spending is needed in order to stimulate GDP growth for the future. And so, the ropes are already becoming tangled as the causality between one indicator and another begins to overlap.
And then you get the infamous Rand/Dollar exchange rate - one of the primary topics at the dinner table - what's it doing and where's it going? The South African Rand is one of the more volatile exchange rates trading in the global markets. This openness to the global markets takes away a certain degree of certainty with which our country is able to predict the future value of its currency, thus sparking large debate over whether it is over- or under-valued, what its optimum level is for our exporting industry, and where our country would like to see it sit in the future. The exchange rate's influence on the housing market comes once again back to its influence on CPIX, and thus the prime interest rate. If the rand strengthens, imports become relatively more affordable, and thus as more imports are demanded and purchased, CPIX rises. The result is a higher level of imports being brought into the country (thus affecting our trade account, and consequently our current account deficit as a percentage of GDP - but that's a whole other story!) which pushes the CPIX level closer to the ceiling target of 6%, thus fuelling the need for an increase in the Repo rate.
And finally, the never-ending ongoing drama of the oil price. It always seems rather odd to me how the world ever got themselves into this mess of oil dependency and cartels. But the reasons are attributable to days gone by and the decisions of our forefathers. Oil, as a direct contributor to our energy sector, largely affects our popular friend, CPIX, due to the amount that needs to be imported and the price at which it enters the country (the exchange rate at which it is purchased). As a result, should the price of oil increase (and in turn, it's highly irritating cousin, the fuel price) the prices of consumer goods will increase. This is not the only manner in which oil as a commodity affects our economy, but one of the more simplistic ways in which to understand it's effect on CPIX, the prime interest rate, and ultimately, the housing market. The current price for Brent Crude oil has subsided over the last few months, mainly due to a warmer-than-expected winter in the northern hemisphere and the resulting need for less heat. In South Africa, the oil price contributes significantly to CPIX and its recent decline has played a part in CPIX remaining below the 6% ceiling.
The general ins and outs of just some of the indicators we see so often splattered across newspaper billboards has been unpacked, but what is the general consensus of the economy's temperature? What type of housing market is this cocktail mix creating? Any economy moving from developing to developed status will experience its own unique combination of both success and failure along the way. Given the positive sentiment within the South African economy, together with the faith and drive for a better future, these major economic indicators point to a housing market that is expected to remain healthy and sustainable. House price growth has remained steadily at a year-on-year figure of 6% for the beginning of 2007, and is expected to pick up speed in 2008 as the expanding middle class continues its demand for housing.
And so, the question must be posed: do we want this economy shaken or stirred? According to the experts, shaking may result in a more satisfying drink, but may 'bruise' the spirit. Personally, I say shake it like a Polaroid Picture because this country has more spirit than any bartender could ever attempt to combine.
Spotting a “Serious” Seller - Jackie Cameron
Six signs you may be on to a property bargain.
As the dust settles after several years of frenzied buying in the residential property market, stubborn buyers are increasingly becoming eager sellers.
The more eager the seller, the better your chances of striking a sale at a good - and even bargain-basement - price.
Identifying a desperate seller, however, isn’t always easy. Some agents are very good at selling with a “poker face” on behalf of their clients.
Here are some suggestions to help you spot a hungry seller:
Look at what’s up for auction. This method of selling tends to be dominated by greedy, wealthy and desperate sellers. That’s because they’re fast and bring willing buyers with chequebooks together in a group to bid on a property. Put in a silly offer and you just might strike it lucky.
Get excited when you come across messy, destructive tenants. No-one wants a property headache. The chances are this landlord’s fed-up with investing in the property market. With some fixing up, the place could be yours for a bargain – though make sure it doesn’t come with the current incumbents.
Get excited when you come across a desperate developer – but only when there are a few units left to sell. Smaller developers in particular don’t like having lots of unsold stock on their hands because they want their cash. As they’re wrapping up a project, they’re more likely to say yes to a low offer on the last bachelor pad.
Chat to the children. No harm done being friendly to the kids as you inspect the property. They just might let slip what the family’s plans are – like emigration. The family that needs to up sticks lock-stock-and-barrel in time for the next school term is unlikely to quibble about a discount on the asking price.
Peep in the cupboards. A big change in personal circumstances can often mean a person is eager to move for emotional reasons. Kieran Trass, author of “Grow Rich with the Property Cycle”, says he once scored a bargain after examining the owners’ wardrobes. Although pictures of newly-weds were dotted around the house, a paucity of women’s shoes made him realise that Mrs Seller was no longer living on site.
Get a handle on the agent. Sometimes agents are more desperate to sell than their sellers. They need sales to generate commissions. When times are a little tougher, they become more eager to sell what’s on their books. They can use their powers of persuasion to convince a seller that a lower price is a “market-related” price. Don’t let them know this is your plan, though, because agents are trained to push buyers – ie, you - as high as they can. Gentle questions about how business has been going, as well as a market analysis in writing, will help you assess the agent’s motivation to score a sale.
Don’t forget, too, that agents are naturally more eager to market a property that isn’t over-priced. No sale means no money for them, so they don’t want to waste their time on something that’s going to sit on the market.
When hunting for a property bargain, make sure the last laugh isn’t on you, by doing homework on the area and property you want to buy.
Some properties are selling for less than you expect because there’s a very big problem, for example crime may be very high in an area or the area is degenerating, not regenerating.
The problem may be in the property itself: there could be a structural problem, like the roof is about to require extensive maintenance work.
Don’t be embarrassed to put in a low offer for any property you spot. You can always submit another offer at a higher price, if the first one isn’t accepted – but you can’t drop the price later.
Life Insurance vs Funeral Policies - Dikatso Mametse
When is it time to take out life insurance?
So you are young, single, and have absolutely no debt. You think life cover is not for you? Wrong.
Generally people take out life insurance to safeguard their family's financial security should they pass away. If you and your partner have taken out a loan, or have bought a house - and then one of you passes on, the other may not be able to handle the payments on his or her own.
If you have children, and both parents pass away - you will want to ensure that your children will be looked after financially.
Warren Ingram, a financial adviser from Galileo Capital, says that people often don't think the possibility that they might end up in an accident and become disabled, as a reason to take out life cover.
"Lets say you are young, single, and have no debt. You might not have enough money to look after yourself if you end up in an accident and can no longer work," he said.
Geraldine Bunting, financial adviser from Cheyenne says that people with debt should have life cover but added that younger people with no debt should rather consider saving money for retirement.
"You must look at your cash flow - can you afford to pay for life cover. And remember this is not an asset to you. Rather put money away for your retirement. In addition to your retirement fund look at putting money in to unit trusts," she said.
What about people who can't afford the higher life cover premiums?
Taking out a funeral policy is an option.
However, before you go ahead and purchase a funeral policy, Lenerd Louw, CEO of 1Lifedirect says that people should shop around for the best option and consider the disadvantages.
"The sole purpose of taking funeral cover is to help your family pay for the costs of your funeral. People must make sure that they fully understand the benefits of the funeral policy they are purchasing and must do some research on the company they are going to be insured with before signing on the dotted line," he said.
Louw says that there is a lot of exploitation in the funeral insurance market because the industry is not properly regulated. Some operators selling funeral cover are not even registered to do so, which means fraud is rife and the risk of your policy not being paid out is high.
Ingram agrees and says there's huge potential for abuse.
Another disadvantage of a funeral policy is that some take a while to pay out when you need the money right away for burial arrangements and funeral costs, says Bunting.
Though it all comes down to affordability, people who are thinking of purchasing a funeral policy should also consider investigating the benefits of life insurance.
Louw says that life insurance policies generally cost a bit more each month compared to funeral policies, but they also generally pay out much more.
For instance, a funeral policy will cost in the region of R50 per month for about R10 000 worth of cover. Life insurance for a 30-year-old woman on the other hand will cost in the region of R120 per month but the payout will be R1m.
Stack the Odds In Your Favour - Matthew de Wet
‘Many people save diligently towards their retirement in the expectation of building sufficient reserves to live out the remainder of their lives in comfort.
Upon retirement they face the difficulty of choosing an appropriate investment strategy as well as having to choose how much to withdraw every month.
The investment strategy will have to ensure an acceptable standard of living, while at the same time reducing the risk that they will run out of money.
By making some realistic assumptions about the expected returns and risks for equities and bonds, as well as the costs involved, pie try to calculate the answers to two critical questions:
How long will my retirement savings last?
How likely am I to have sufficient funds to last for the remainder of my life?
In the top table we attempt to answer the first question.
Expected Withdrawal Period
(Years) |
|||||
| Asset allocation withdrawal rate | 0% equity |
25% equity |
50% equity |
75% equity |
100% equity |
2.5% |
38 |
>40 |
>40 |
>40 |
>40 |
4% |
25 |
29 |
33 |
38 |
>40 |
6% |
17 |
19 |
20 |
21 |
22 |
8% |
13 |
14 |
15 |
15 |
15 |
10% |
10 |
11 |
12 |
12 |
12 |
12% |
9 |
9 |
10 |
10 |
10 |
17.5% |
6 |
7 |
7 |
7 |
7 |
|
Assumptions: Equity returns of inflation + 7.5%
with 17% volatility. Bond returns of inflation + 2.5% with 7% volatility.
Total costs of 2.5% per annum in total. Individuals' tax rates are
not taken into account. |
|||||
Probability of success %
- males (after costs) |
|||||
| Asset allocation withdrawal rate | 0% equity |
25% equity |
50% equity |
75% equity |
100% equity |
2.5% |
99 |
99 |
99 |
99 |
99 |
4% |
86 |
93 |
94 |
95 |
96 |
6% |
60 |
68 |
76 |
80 |
82 |
8% |
43 |
47 |
54 |
61 |
65 |
10% |
32 |
35 |
39 |
45 |
50 |
12% |
26 |
28 |
30 |
34 |
39 |
17.5% |
17 |
17 |
18 |
20 |
22 |
Probability of success %
- females (after costs) |
|||||
| Asset allocation withdrawal rate | 0% equity |
25% equity |
50% equity |
75% equity |
100% equity |
2.5% |
97 |
99 |
99 |
99 |
98 |
4% |
75 |
86 |
91 |
92 |
91 |
6% |
42 |
51 |
62 |
69 |
73 |
8% |
26 |
30 |
37 |
45 |
52 |
10% |
18 |
20 |
24 |
29 |
36 |
12% |
14 |
15 |
17 |
20 |
25 |
17.5% |
8 |
9 |
10 |
10 |
12 |
We consider the number of years after retirement that our money is likely to last (with a two-thirds probability of being right), given certain withdrawal rates and equity allocations.
The withdrawal rate is how much of our capital we withdraw every year once we retire, as a percentage.
We all wish to maintain our standard of living through time, so that amount will have to increase every year by the rate of inflation.
As the regulated withdrawal limits for annuitants were recently changed to between 2.5% and 17.5% of fund value each year, these will form the upper and lower limit for our withdrawal rates.
It is clear from that table that the range varies dramatically.
With high annual withdrawal rates our money is expected to last only six or seven years, but for lower withdrawal rates our money can be expected to last more than 40 years - well past the expected life span for a person retiring at age 65.
Note also that, generally speaking, the higher the equity allocation, the longer one's money is expected to last.
This is not as pronounced at high withdrawal rates, as investors can't enjoy the compounding effects of the higher returns that equities offer over time.
However, it is not sufficient to know how many years our money is likely to last. More importantly, we must consider the likelihood of not running out of money during our lives.
As women tend to live longer than men we have calculated the probabilities for both sexes. (A key assumption is that men are expected to live for 16 years from age 65 and women for 21 years.)
The remaining two tables show the probability that you will not run of money, for men and women who retire at age 65. The chance of success is higher for men than women; it becomes higher if you are invested with a higher allocation to equities.
Neither very high nor very low withdrawal rates are optimal for any asset allocation because the retiree is likely to either run out of money or unintentionally leave behind too much.
You may be surprised to see that there is, in many instances, quite a low chance of success.
However, it seems that with the right withdrawal rate in the region of 4%-6% annually (perhaps 8% for males), and having a reasonable portion (50%-75%) invested in equities there is a fair chance of not running out of money.
Besides finding the success rates for different withdrawal strategies, another objective of this study was to show the effect of expenses. If expenses are not deducted from the investment, the probabilities of success increase by 13%, on average. This highlights the importance of understanding the costs of advice and investment management.
In summary, although equities are risky in the short run, their long-run out performance makes them an essential component of every investment portfolio.
Becoming A Millionaire - Jackie Cameron
Fidentia Chairman Arthur Brown and accountant Graham Maddock each needed at least R1m for bail.
Many people were surprised when Brown, a man who paid himself millions of rands as a salary and is at the centre of an investigation into the whereabouts of millions of rands, appeared to be struggling to scrape together some cash.
The amount of R1m may seem like a large amount to those of us who aren't head of a large corporation or earning a living as a rock star investment professional. The shocking truth about your future financial security is that you need far more than R1m these days to retire even modestly after a long working life.
To give you an idea of what you need to save, go to the Financial Requirements for Retirement calculator at http://www.absa.co.za.
Playing around with a few numbers, like how much you'd like to receive when you retire and when you'd like to retire, is the financial equivalent of taking a very cold bath in winter.
For example, if you're 25 now and you'd like to stop working at 40 on a relatively modest R16 000 a month, you need to start saving at least R20 000 a month - or you don't stand a chance of achieving your goal.
If you gave up on retiring young long ago, the figures may be a little more palatable, but only if you have already been saving. Here's an example: you're 40, you've got R500 000 saved in a company pension and you are resigned to retiring at 65 when the company boots you.
Absa's calculator will tell you that an extra monthly saving of more than R3 000, in addition to the R2 500 you are already saving in your pension, should help you secure a monthly income which is the equivalent of R20 000 today when you retire in 25 years time.
Now that assumes, of course, you invest your money wisely in a place where it grows and other people don't raid your savings' for hefty fees or, worse, steal it altogether.
Currently about R1m invested in a better-performing money market account will produce the equivalent of roughly R7000/month. That means you need at least R3m working for you to produce an income of R20 000/month.
Remember, too, that the longer you have to retirement, the more millions you will need because inflation, over time, erodes the purchasing power of your money. An income of R20 000 will buy you far less in ten or 20 years time than it will today.
So how do you get started?
- Save more than you think you should. Some investments will never work out the way you plan, because of unforeseen risks and situations. Always stash away extra.
- Cut your debt and move into savings mode. Saving while you owe huge amounts of money on credit cards and cars is like peddling backwards because of the interest you must repay.
- Have several types of investments. Don't just invest in shares or property. One type of investment may not work out for you. You may end up buying duds or needing the money when that market is in a slump.
- Have savings' goals - and stick to them. If you don't get into the habit of saving and investing early, the chances are you will never get your affairs in order. Look at the people around you who seem to struggle and you will notice that often it is a personality thing; they just don't have the right personal discipline or approach to finances. Few people suddenly wake up later in life and suddenly become successful investors or improve their personal financial management. It starts early, with a conscious decision to manage money well.
- Don't rely on a windfall. Some people are lucky. They land well-paying jobs, inherit money from distant relatives or win money. Most of us aren't lucky. We need to work hard at saving and investing. Compounding of returns over time can help those of us who aren't able to consistently spot investment winners and buy and sell at the right time.
- Becoming an entrepreneur rather than relying on fixed employment can help in your quest to become financially independent. But even that is fraught with pitfalls. Running a business is complex and high risk: you have to get the details of whatever market or industry you have chosen right, as well as the underlying financial management.
Just ask Arthur Brown: after accessing more than R2bn and building an empire of about 70 entities in a few years, his world has come crashing down around him.
With inadequate cash being generated by the companies he bought with other people's money, Fidentia appears to have been little more than a daring pyramid scheme.
Brown relied on a windfall: in his case, money that was not his own to spend as he saw fit.
The investor of today does not profit from yesterday's growth.
- Warren Buffet (1930 - )
