NEW MUNICIPAL PROPERTY RATES AMENDMENT BILL

The Municipal Property Rates Amendment Bill - currently before Parliament – sets out to charge people who own more than one residential property commercial rates on the additional homes.

Moreover, local residents’ associations, estate agents and other investors had until July 22^nd to lodge their objections to the proposed national legislation that will affect rates levied by all municipalities throughout the country.

People who own more than one residential property will be forced to pay commercial rates on the homes in terms of the Property rates amendment bill. This means that anyone with a holiday home or who owns an investment property that is being rented would see property rates on those properties double and they would also lose any municipal rebates on those properties as well.

In terms of the new Bill, the definition of “residential property” has been changed, and now only the home that the owner is living in is deemed residential and classified as the “primary property”. The other properties are defined as commercial properties in terms of the Bill.

Lilian Develing, chairman of the Combined Ratepayers Association in Durban says that the legislation will have a serious impact ton the property market and that the letting business will be severely impacted because rentals will rise sharply. She says that the moment the residential rate is 0,907%, while the commercial property rate is more than double at 2,057%. This means that for properties that are not deemed to be the “primary property” the rates would more than double.

The Democratic Alliance’s councilor and eThekwini caucus chief whip Dean Macpherson warns that the bill lwill lead to a collapse in property investments. According to attorney Maria Davey from Meumann White, owners of investment properties were already forced to pay additional capital gains tax and also had to pay income tax on the rental received. Now they will also have to pay higher rates bills.

She says that many people had provided for their retirement by buying a second property that was initially rented to tenants but in later years, would be used by them as a retirement home. Davey says that if the legislation is passed in its current form then it may prevent people from making these sorts o fprovisions.

The DA has attacked another change contained in the Bill that would see the current valuations by municipalities being extended from five to seven years. In practice this means that if property values decline, rates would remain unchanged at the higher level until another valuation was done, even though the value of the home had falledn.

Comment from AfriForum

“It appears that the redefinition of residential rental property as commercial property will amount to a form of income tax, which will be a violation of … the Constitution,” said AfriForum head of community affairs Cornelius van Rensburg. The Municipal Property rates Amendment Bill proposes that people who own more than one residential property will be forced to pay more expensive commercial rates on additional properties. Up until now, property tax has been based on the status of a property under municipal zoning. “If the amendment are approved, the focus will shift to whether or not income is generated from a property”.

The Constitution calls for the state to create an environment in which property is accessible to all inhabitants of the country and enshrines the right of access to housing, AfriForum said “Given the economic impact of the proposed amendments, only the super-rich and the state will be able to enter the property market due to higher administrative costs of property ownership,” said Jansen van Rensburg. “Rental properties will become unaffordable for people who do not qualify for mortgages, thereby increasing people’s reliance on the state for housing.” He said “the proposals appears to come down to another form of nationalization through taxation”.

“the proposed amendments are likely to drastically limit property ownership among the middle class.”

Source: Timeslive & Property 24

The Consumer Protection Act and the Property Market - 26 August 2011

Inspections tied to new insurance policy will give buyers and sellers peace of mind.

The Consumer Protection Act (CPA) affords home buyers specific protection and rights.  Buyers have a right to expect that the properties they buy comply with all relevant legal standards and are without undisclosed defects.

Likewise home sellers and agents have specific responsibilities and liabilities. The traditional “voetstoots” (as is) no longer provides blanket protection for sellers and their agents. The seller is liable for latent and patent defects. The only real protection is for sellers/agents to commission home inspection reports upfront and make them available to potential buyers.  Deeds of sale should include declarations by the buyers that they have been informed and are aware of the defects disclosed in the reports.

Even if a home inspection report is made available to the buyer, during a six-month period after the buyer has taken delivery of the property, the buyer can demand redress if previously undisclosed defects are discovered. The sellers must “repair, replace or refund”, with a further 3 month implied warrant after repair. The only potential liability then remaining is for latent defects which could not be seen by home inspectors e.g. faulty plumbing, equipment failure (geyser).

Insurance companies are working to develop an insurance product that will protect sellers and estate agents from liability under the CPA.

AUGUST 2011 - SA PROPERTY MARKET CORRECTIONS

Lola Kramer 083 252 1023
Principal Agent & Property Expert

Not as painful as the USA property market

South Africa is experiencing a property market correction. The question is whether it is or has been on the same scale as has been experienced in the USA during the last 3 years. The American dream has in some states unfortunately changed into an American nightmare. Only a certain sector of the South African property market is experiencing a correction akin to the “American nightmare” of a devaluation of property value up to 50% and has predominatly been visible on two fronts.

The first area is in the buy-to-let market section and more specifically in areas with an average to low rental demand. This generalized statement needs however to be qualified even further to pinpoint complexes with a below-par managing agent and/or a Body Corporate who has allowed a bad rental mix to develop over the last 4 years. Compelxes where the house rules do not “control” the quality and the average rental income for the units, have been experiencing sheriff auctions which culminated in a drop of value between 45% to 60% below present CMA (comparative market analysis) values.

The second area has developed around the affordability of credit/cost of servicing bonds, resulting in a high level of household debt to disposable income (due to high unemployment levels etc).

This buyers market environment in the above-mentioned first “front” came about due to the new property investors who did not do their homework properly during the “2004/2006 boom”. Creating a distressed sales market scenario with an oversupply of stock which will take some time to clear out. With e.g. South Africa’s biggest bank and bond provider, ABSA, indicating that their bad debt book is at present about 18%,  a change in stock levels (due to an oversupply of certain property types) before 2014/15 is highly unlikely – despite a growing black middle class and savvy property investors buying up rental stock which is delivering the sought-after 1% per month returns. A nominal house price growth closer to the historical 10% per annum average could therefore only become visible again when the oversupply has been dealt with, potentially initiating another so-called 23-year property cycle with a positive capital growth cycle in nominal as well as real terms.

In total, approximately 11% of all homes in the United States are currently standing empty. No comparative residential market figures are available for South Africa – but given the huge demand experienced for rental homes, it is highly improbable that there is such a problem at all in the suburbs of the metropolitan areas. According to property economist Rode & Associates, apartment vacancy rate across South Africa has dropped from a peak of around 6% in the fourth  quarter 2009 to the current 4%.

The following correction symptoms are present:

1.       High percentage of distress sales
The large percentage of distress sales in the property market has increased in the first quarter of 2011 to 22% of total sales – up from 17% in the last quarter of 2010. A high percentage of sellers are therefore forced to downscale due to financial stress, often below market values.

2.       Availability of credit (bonds or mortgages) limited
Housing price deflation is being fuelled by banks that are constantly reassessing their exposure to the home loans market and being cautious in granting new bonds. According to OOB, their March 2011 levels of bond approvals only equate to 36% of the levels achieved during the top end of the property boom in April/May 2007. It is however their highest levels since October 2008, showing that there is a gradual but positive movement in the SA Property Market. Only 44,7% of Ooba’s bond applications are at present initially declined by the banks – which is an -8.1% improvement in the decline ratio. The effective approval rate has improved from 58,9% in March 2010 to 64,5% in March 2011.

The implementation of the NCA (National Credit Act) has redefined a borrower in South Africa. A large percentage of borrowers have been classified as a credit risk based on e.g. a few missed credit payments. Until the banks will operate on a more discerning basis, evaluating the long-term reliability of the applicant as evidenced by his job record and possibly testimonials from his work superiors and bank manager, home ownership in the entry level property market will remain a problem . . Deposit requirements remain a stumbling block for e specially buyers who want to buy into the affordable housing markets in townships. According to Ooba the average deposit as a percentage of purchaswe price fell 23,9% year-on-year to R134 519, equivalent to an average deposit of 15,6% of the purchase price of the average home in SA of R860 492.

3.       High bond or mortgage stress levels
According to Rael Levitt (CEO of Auction Alliance), South African house price deflation is reflected in negative housing equity to most probably 1 in 15 (about 6,66%) of all South African homes. This is however in comparison to the USA still at a fairly low level, as at the end of 2010, 23% of all US homeowners with a mortgage owed more on their homes than their homes were worth.

4.       Low sales volumes
Mike Schussler (Economist.co.za) indicated that although 16.8% more transactions (9506) registered in South Africa in the Deeds Office during January 2011 than in January 2010, it is still 40% below the average transaction volumes of the S property market during the last decade – i.e. about 16 000 transactions per month for 192 000 p.a.)

5.       In January 2009, 9190 transactions had been registered in the Deeds Office – showing an increase of 3.5% in registered transactions between January 2009i and January 20-11. If the above 22% of distressed sales can be applied to the monthly registrations during the first quarter of 2011, it means that about 2100 property transactions per month are at present transacted nationally under distressed conditions. This is up from 1200 per month as had been estimated by Auction Alliance during the beginning of 2009.

Another dampening influence on sale volumes in South Africa has been the relative low levels of buy-t-rent investors – who at the moment comprise only some 7% of the total property buying market, down from about 22% during the property boom period.

6.       Besides “debt”, the rest of the property market stimuli have been strong enough to keep the price grown in South Africa relatively intact – varying between -10% to just over 0% during the last 3 years.

Nominal price growth of between 1% and 1,5% is currently forecast by ABS for the South African property market in 2011. Based on this forecast and  a projected average consumer price inflation rate of 5% this year, house prices are set to decline by more than 3% in real terms this year in South Africa.

7.       Uncertainty about market values of SA property
Despite a 421% increase in price between 1997 and 2011, even the Economist (of 3 March 2011) did not or could not determine in their global house price index whether South African properties are in fact overvalued – relative to 20 other countries. In theory, the price of a home should reflect the value of the services it provides. People who choose to rent their homes, buy those services on a monthly basis. Home prices should therefore reflect the rents that tenants pay.

An open question since the 2007 turning point – i.e. the top-end of the price growth cycle, is whether the capital growth gains in house market values created a property market bubble and stands to be corrected bya  dramatic price decrease. This question has also played a role in undermining buyer confidence. As some buyers view the extraordinary growth of 421% achieved in the SA Property Market in the last 14 years at an average of 30% per year, as a market which stands to be corrected, not only in nominal price terms but also by about 50% in real price terms.

In the 1980’s however high levels of inflation created a scenario where nominal prices of houses kept growing due to the devaluation of the Rand – preventing a bust scenario as the price growth pattern remained on a plateau for about 6 years to 1997, before nominal prices of the average house began another rapid grown phase – between R194 435 (1997) to R930 332 (2007) – that is a growth of 378% in 10 years or about 37.8% per annum.

The South African property market has during the last 50 years reacted differently from the boom-bust scenarios experienced elsewhere in the world. The 2010 proeprty plateau will most probably be longer than the 6-year span experienced during eh 90’s and its run will be determined by the inflation rage and locally its effect on our currency.  The biggest difference however between the plateaus of the 90’s and 2010 is the remedial effect that the growing black middle class will have on the property market.

To expect a 50% doom and gloom “correction” in the SA property market simply because the forces of the property market in the USA necessitate it there locally, is to ignore the huge historical difference beween the countries. The South African market has potentially amongst the highest percentage of first time buyers (or upgrading buyers) in the world amongst the emerging black middle class – most of them eager to commit the moment credit will become more readily available.

Source: Real estate web

AUGUST 2011 - WHAT DOES THE CONSUMER PROTECTION ACT MEAN FOR PROPERTY BUYERS

Lola Kramer 083 252 1023
Principal Agent
Property Expert

Theres some good news and some bad news
The legal principle around buying and selling has always been “caveat emptor” – “let the buyer beware”. In terms of the Consumer Protection Act (CPA), which came into force on April 1 this year, that changes: its now the seller who has to make sure all goes smoothly.
This fundamentally changes the way business is done, in that it puts the burden on busesses to transform themselves into “customer-friendly” operations, making all interactions fully transparent. If a customer feels cheated or ripped of, it’s the seller or service provider who is presumed guilty until proven innocent.

The new Act, at its heart, is thus about protecting vulnerable and less well-informed consumers, who may be prejudiced by complex contracts or loaded bargaining positions. In this, its been hailed as a piece of legislation that makes South African consumers amonghst the world’s best protected.
What does it mean when you’re buying property?
The new Act protects property buyers from unscrupulous estate agents. For instance, estate agents now have to ensure that potential buyers are fully informed regarding the condition of any property they buy. The “voetstoots” clause in an Offer to Purchase will no longer protect estate agents from the perilds of non-disclosure.
Another benefit for buyers is that agents can be prosecuted for making false claims about a property, for instance that it has been zoned for certain uses, or that plans have been approved to make alterations.
An imp;ortant point here is that the CPA is limited to transactions concluded as part of regular business. Private sellers therefore, are not held to the terms of the CPA, so in the case of a private sale, you would do well to be extra-scrupulous about the terms.
Are landlords countrywide about to get a horrible surprise?
In terms of the CPA definitions, landlords are suppliers, and tenants are consumers. Again, however, this is true only if landloring is part of one’s regular business.
Still, there is much nervousness about what the CPA means. For instance, a clause that prohibits discrimination on any grounds, including income, suggests that a landlord cannot “discriminate” against a tenant who cannot pay his full rent. It remains to be tested in court whether the obligations of the rental agreement would weigh less than a tenant’s changed circumstance.
There’s also a clause in the new Consumer Protection Act that – no matter what the contract says – allows the tenant to give the landlord 20 business days’ notice of intention to terminate the lease.

AUG 2011 - THE CURRENT PROPERTY MARKET

ECONOMIC INDICATORS RELEASED IN JULY POINT TO INCREASED PRESSURE ON THE RESIDENTIAL MARKET IN THE NEAR TERM, DESPITE SOME IMPROVEMENT IN HOUSE PRICE GROWTH RECENTLY.
The mild acceleration in the year-on-year growth rate in house prices in July is believed to be largely the lagged impact of slightly stronger demand times back in the summer quarters, due in part to late-2010 interest rate cuts. Looking forward, economic indicators released in July would suggest a possible increase in pressure on the market, and with it a possible slowing in house price growth later in the year once more.
The South African Economy, and thus to a large degree its housing market, is very much in sync with trends in the global economy, which at present looks to be showing signs of weakening. Over the past weeks, US lawmakers have been in a huge tussle aimed at reaching agreement on the terms and conditions accompanying a lifting of the legal government debt ceiling in that country. Should this not have been done by Tuesday 2 August, the possibility of that country defaulting on its government debt had been mooted. Default now appears unlikely, with reports that an agreement had been reached over the weekend. Nevertheless, even should default thankfully be avoided, the markets have been decidedly nervous about the whole matter, and ratings agencies have been talking about possible ratings downgrades for the US.

It will be tough for the US to avoid another recession, implying significant growth slowdown for the global and South African economy. This time around, with its policy interest rate at near zero and a pressing need to reduce its fiscal deficit and borrowing requirement, the US has less ammunition with which to fight any severe economic slowdown than it had in 2008.

And all the while, the fact is that US economic growth had already slowed to pedestrian pace by early this year, measuring 0.4% and 1.3% quarter-on-quarter annualized real economic growth rates for the 1st 2 quarters of 2011. Significantly higheroil prices ever since the start of the Egyptian and Libyan crises a few months ago must be seen as a key source of pressure, on what is also the world’s largest oil guzzling economy, during the 2nd half of the year too.

Domestically, sharp increases in both global oil and food prices have been instrumental in raising SA’s consumer price inflation to 5% year-on-year by June causing many economists to anticipate that the next move in interest rates will be up.

However, with signs that our own economy is coming under pressure due to global economic weakness, hikes in interest rates any time soon are far from a foregone conclusion, as inflationary pressures could start to wane soon on the back of economic weakness. Indeed, in the July SARB
onetary Policy Committee statement the Bank began to mention emerging downside risks to
inflation going forward that emanate from a weakening global economy.

But such a scenario of “low interest rates for longer” does not promise to be good news for property, because economic weakness itself has a major impact on the housing market due to the pressure it exerts on employment and household income growth.

With the world’s largest economy, the USA, under pressure, and we haven’t even mentioned the trouble that Europe is in too, our own economy is bound to come under pressure, and this can already be seen in the SARB Leading Business Cycle Indicator for SA, whose month-on-month growth rate has been negative for the past 3 months. Our own FNB Estate Agent Survey, in which we ask agents for their rating of the strength of demand, has already started to point to weakening, with the year-on-year rate of change in the demand rating actually even leading the G7 Leading Indicator downward.

Given this weak economic background, our expectation is for the recent acceleration in house price growth to be short-lived, with a slowing in the pace of growth resuming in the final months of 2011.