Insights from the South African Property Transfer Guide (SAPTG) research team reveals changing trends in property buying that property professionals and investors should consider when formulating their respective marketing and buying strategies…

Marketing insights company Knowledge Factory has released a report based on data derived from SAPTG that highlights two of the most noteworthy current trends in the South African property market.

The financial downturn has changed buying patterns significantly. Drawing on property sales data from national figures in South Africa for the past five years, the report reveals the rise of cash sales as a percentage of total property sales.

Is this just due to the rise in repossessions or are there other factors to consider?

Additionally the report shows the steady convergence of full title and sectional title prices. This in spite of the fact that the number of sectional title units sold has suffered a greater year-on-year decline than full title units.

So what are the underlying reasons?

Knowledge Factory’s Dieter Deppisch, Property Data Research National Manager, will be discusses these trends in detail...

Trend 1: Cash is king

The first trend that stands out when reviewing the data is that 'cash sales' — defined as transactions where no bond was registered at the time of transfer — are increasing as a percentage of total sales year-on-year. From a high in the 2003/2004 period, cash sales steadily declined as a percentage of total sales over the next five years. However, this trend started reversing in the period 2006/2007 and cash sales of full title and sectional title properties rose to 33 percent or one in three sales during 2008/2009. 35 percent of all sales of full title properties were cash compared to 30 percent of all sectional titles. In addition, a considerable 35 percent of the total Rand value of all transactions accounted for were cash sales.

Dieter Deppisch, who heads property data research at SAPTG, highlights the introduction of the National Credit Act (NCA) in June 2007 as a catalyst for the decrease in the ratio of bonded sales to cash sales. "As expected, the introduction of the NCA and subsequent tighter lending criteria has driven cash sales upward as a percentage of all sales," Deppisch confirms. "Many people who could obtain financial assistance for their property purchases in the past are now excluded. According to the largest bond originator in South Africa, only one out of two (50.5 percent) potential buyers applying for bonds are currently being approved."

Other reasons for the rise in cash sales as a percentage are, predictably, related to the current financial crisis. "With repossessions on the rise the fortunate few with sufficient liquidity are picking up bargains at auctions," Deppisch observes. "Property is also an increasingly attractive asset class for investors disappointed by recent poor returns in the equity market and other investment classes. Property, while no get-rich-quick-scheme, is being favoured as a 'safe haven' that will yield healthy returns in the long term."

Deppisch also believes the trend is being magnified by the growing numbers of estate agents that are responding to the market downturn, tight lending criteria and high bond decline-ratio by actively targeting cash buyers.

Trend 2: Sectional title prices rising

The second trend is the convergence of sectional title and full title property prices, confounding the common logic that apartments and townhouses are simply entry-level buys. According to SAPTG data, which tracks the median price trend, the two price medians have been getting steadily closer since 2004/2005. In that year the median prices of full title and sectional title were separated by R61 435, in subsequent periods by R50 000 then R32 000 then R16 000 and finally at the end of 2008 they crossed over, with the median sectional title value actually R20 000 more than their full title counterparts.

This does not mean that sectional title is now the most popular property type. Overall the volume of sectional title units sold has declined at a rate more rapid than that of full title properties. While SAPTG research indicates a 34 percent decline year-on-year in full title it shows a 36 percent decline in sectional title (footnote: properties within the R200 000 and R5-million range between April 2007 and March 2008 and the corresponding period in 2008/2009).

The converging effect then has been in rand value. What has stimulated the positive growth in sectional title prices and the negative growth in full title prices?

Recessionary economic drivers are contributing factors, as Deppisch elaborates. "We have seen a rise in the debt-to-disposable-income ratio over the past two years. Many buyers have responded to pressure on their household budgets by purchasing smaller living spaces that are perceived to be cheaper, offer value for money and are less costly to maintain," he explains. "These changes are also part of larger shifts in lifestyle as buyers opt to move closer to their places of work to save fuel costs or even to move to different suburbs in order to save face with their friends if they can no longer maintain their previous lifestyles."

Deppisch cites security as another factor. "Sectional title properties are perceived to be more secure because many complexes implement centralised security measures such as 24-hour guards and secure access," he asserts, "and buyers are comforted by the notion that there is safety in numbers."

Property developers have also played a role in the rising price of sectional title properties. "They have responded to the changing demographics of buyers by upgrading finishes within sectional title units," confirms Deppisch, "which, in turn, made them an attractive option, especially for those who were downscaling and wanted to keep as many of the comforts they previously had in their full title home."

Finally, some (cautionary) good news

Conceding that the property market has, in many respects, suffered the brunt of the financial crisis, Deppisch concludes on an upbeat note. "The significant decline in insolvencies growth, decreasing debt-to-income-ratio, expansion in the retail sector, strong public-sector spending, falling inflation, low interest rates boosted by the 2010 positive sentiment will generate in property buyers, indicates a bottoming out in the current cycle."

However, he maintains: "While we are not out of the woods yet, given reduced tax revenue, job losses and volatile commodity prices adding to a list of ongoing risks, it does mean that we can anticipate that the situation won’t deteriorate any further. Buyers remain skittish and it may take six months or more for the impact of lower interest rates to filter through to the real-estate market in general. Indeed we expect the cyclical movement to a seller’s market to begin in the first quarter of 2010. Meanwhile cash buyers will continue to benefit from lower property prices as many sellers still drown in debt. Prudent management of personal finances has never been more necessary given the ongoing risks we face in this unfolding drama we call the South African economy!"

For further details visit SAPTG at www.saptg.co.za or contact Knowledge Factory directly on (011) 445 8100.

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