Boilerplate Introduction: I’ve only just bought a house and I don’t claim to be any kind of expert. What I’m writing here is merely the things I learnt along the way… sometimes they might be blatantly obvious and other times they can be quite surprising. Because I’m no expert, please feel free to leave a comment if I’m wrong or you think I’m missing something. I wanted to write this now, before the shock and awe has subsided and before the lingo and concepts become too common place to seem unusual.
The obvious answer to the “when to buy” question is “When the prices are at their lowest and when the interest rate is about to start coming down“… That’s obviously hard to predict, but there are some things that will help you.
Low prices are caused by a few things:
- Overstock: There are too many houses on the market and sellers drop their prices in order to be more competitive than the place down the road.
- Tough Times: In tough financial times there are fewer buyers. When there are fewer buyers you need to entice them by lowering prices.
- Overstock, Tough Times and Desperation: This is the trifector. Tough Times cause more people to sell which causes Overstock which causes people who really need to sell to push their prices down. Its a very uncomfortable place to be for a seller and one would assume that most sellers would just try and weather the storm… but, as you can imagine, not everyone can…
Why People Sell Their Property
You get a few different types of sellers and understanding them can explain the market and help you predict when and how things are going to pan out.
- Distressed Sellers: These are the guys who have either lost their jobs or bought at the maximum amount that their banks would allow and are now unable to meet their monthly payments because the interest rates have gone up 5.5%. On a 1 million rand bond, 5.5% means your monthly payment went from R8 970 to R12 790 (Roughly R4000 per month). These guys risk forclosure from the bank… which essentially means the bank will auction the house at less than it’s worth and force the owner to pay the difference. ie. Lose everything you’ve paid into your house and end up with a crapload of debt and a very bad credit record. This is where you’ll usually pick up property at very low prices. I’m glad I didn’t need to buy property from a person like this, I would have felt too bad.
- Investment Sellers: These guys have money and probably a few properties. They bought back in the day and are probably renting the place out. Investment Selllers understand that the market will always recover and they’re willing to wait it out. These guys are responsible for the R900 000 properties on the market that suck more than the R600 000 properties. They’ll leave it on the market at R900 000 until the market corrects itself or until some poor idiot comes along and pays R300 000 too much for the place.
- Liquifying Sellers: These are the guys who are trying to turn some of their assets into cash so that they can start a company or buy a yacht etc. They’re not as price concious as investment sellers but they also won’t settle for less than they paid. They usually have other options.
- Moving Up Sellers: This is typically a couple who have outgrown their house or want something better. They might even have bought another place already on the condition that they sell their existing place first. These guys can be quite desperate but are also not stupid. They have nothing to lose other than the chance to move into the home they really want. They’re also flexible and understand that property prices fluctuate so they might loose R50k on the place they’re selling and score R100k on the place they buy.
- Weird old ladies with bug phobias. You will occasionally run into some odd people selling their properties, especially when they’re selling privately. They can be harmless but can also waste a lot of your time. They typically overvalue their property because they haven’t had a property agent give them a reality check with a clue-by-four yet. I can’t imagine how painful it would be to actually try and buy a place from one of these people.
- FUD: Fear, Uncertainty and Doubt is an interesting aspect to all of this… Assume you bought a house 5 years ago for R400k, 2 years ago it was worth a million, but now agents are saying that the market is getting worse and your house will only fetch R900k. With looming interest rate hikes there’s a chance that before you know it your house will be work R800k. If you are not willing to wait out the next cycle (4-8 years) you might want to sell now while you might still get R900k.
The reason you need to understand the sellers is because it will help you put a price in perspective and know what a reasonable offer would be. You’ll usually be able to spot the sellers motives by looking at the house and asking the agent.
The important thing to recognise is that Interest Rates have a direct impact on property prices.
There is supposedly a 5 year cycle in property, but the last boom was about 5 years ago… maybe more depending on who you ask. I think the cycle does definitely exist, but I think it is sped up or slowed down by other factors like Interest Rates, Inflation Rates, Politics, General Happiness, Voodoo etc. I also think that the market is self-fulfulling to some extent. In other words, if enough analysts predict higher sales, people go and buy houses.
I think the cycle is anything between 4 and 8 years… the trick is obviously in knowing how to predict the troughs and peaks.
It seems that we might have just hit the bottom of one of those troughs. Analysts are slowly starting to predict better outcomes and Investec says that StatsSA have overstated inflation and the interest rate should proabably be 2% less than it is right now. To put that in perspective, that 2% represents about R1500 per month on a million rand loan. If the interest rate drops by the full 5.5% that it gained in the past few years it brings things down a lot more. But that is truly the BIG IF.
The bottom line seems to be to buy at the very bottom of a trough or while prices are going down… if you’re ready. Don’t get suckered into buying when prices are on their way up in case they go so high you’ll never be able to afford to own property… That’s the FUD speaking.
Over and out.