Property - Is it a safe investment?

For real returns and less aggro, stick to penny shares. High interest rates, stringent National Credit Act (NCA) demands and chaos in the general property market, make it increasingly difficult for first-time buyers to get onto the property ladder. Prime is now at 11%, so the struggle continues for first time buyers. According to Erwin Rode, CEO of Rodes & Associates, there's no reason to believe affordability will improve in the next year.

According to the Absa House Price Index, over the last few years we saw a general upward trend in residential house prices. In 2004, prices increased 32.3% year on year; in 2005, it increased 22.7%; and 2006, prices rose 15.3%. But then, in 2007 came the first sign of trouble: House prices gained a mere 14.9%. In August last year, the average nominal price of a middle-segment home (a home priced at R2.9 million or less) increased, year on year, by a measly 1.7%.Since then, house prices (calculated on a month-on-month basis) have been declining. And this means, in real terms, “prices have dropped to levels last seen in early 2006”. According to Absa’s House Price Index (published for September 2009), the average nominal price of middle-segment housing is down 7.1% year.A property crash, like we’ve witnessed in the Western world, is a very big fear, particularly since many South Africans haven't adequately prepared for retirement, and have most of their wealth tied up in their property. Faith in property is perverse, and potentially disastrous. Shares beat houses hands downAccording to the Rode’s Report on South Africa’s property market, our forecast for the remainder of 2009 is even bleaker, with no foreseeable relief in future. This means that “although interest rates have come down and more cuts are expected during 2009, this is unlikely to boost the market in light of housing, on the whole, still not being affordable”.Yes, the FNB Residential Property Barometer for the first half of 2009 has shown a mild improvement in property demand levels, but it still indicates a rather unconvincing picture.According to a recent report published in The Citizen:“FNB Property Strategist, John Loos, says that one shouldn’t expect residential demand to skyrocket as it did in 2003/04 as interest rates fell rapidly, because 2003 rate cuts were accompanied by a very positive economic growth and employment situation at the time. He added that strict lending criteria are not set to ease dramatically any time soon but interest rate cuts should improve affordability.”Loos continues:“Interest rate cuts are expected to lead to a gradual recovery in residential demand as 2009 progresses. However, we don’t anticipate any fireworks.”So what does this mean to you:For a start, when interest rates are lower, most people can service their debt more easily. But when interest rates are high – as they’ve been over the past few years, the affordability of buying a house is significantly affected. You see, even though we’re currently experiencing a downtrend in our inflation rate environment, the effects of high inflation still weighs heavily on potential buyers. Add to this the fact that stricter lending criteria is making it harder to get a loan and banks require anything between a 15% and 30% deposit, and you can see why the property market remains distressed.Why is inflation so important? Well, let me demonstrate:With prime currently at 10.5%, you’ll pay R9,983.79 on a R1 million bond over a period of 20 years.. That’s a whopping R3,555.01 saving from nine months ago when rates were at a stifling 15.5%.So what does the future for the property market hold? Says Jacques du Toit, ABSA’s Senior Property Analyst:“The household sector is forecast to continue experiencing some financial strain this year, despite declining inflation and interest rates… As a result, the housing market is expected to remain under pressure for much of 2009, with house prices forecast to drop by a nominal 3%-4% and a real 8%-8.5% this year.”But this isn’t necessarily a bad thing – especially for first-time buyers. You see, although the number of first-time buyers entering into the property market has halved from a massive 32%, recorded in 2005, to a mere 12% in the third quarter of 2008, we’ve seen a slight improvement since then. The level of first-time buyers rose from 12% in the third quarter of 2008 to 17% in the fourth quarter. Now that interest rates have begun to turn, banks expect a larger number of first-time buyers to arrive in the market. This will be an important indicator to monitor in coming quarters.Why? Well consider this: An existing homeowner sells his home, which has appreciated in value, to a new buyer. The existing homeowner then buys either a new home or an existing home, presumably at a higher value. The process repeats itself down the line, with each level of buyers trading up for a new or more expensive home. There must be a constant stream of new home buyers. Without demand, there’s no market for existing homeowners to “trade up”.When there's a crash in property prices, the value of your home may not be the only thing to suffer. If you're overexposed to property, then it may be wise to rebalance your portfolio. For many people, their home and/or their investment property will make up a large part of their “portfolio” of investments, savings, finances or capital.Investors must accept a far lower asset-inflation rate and rely more on income to build their wealth, owing to the impact of interest rates currently and in the near future.The best bet for a happy retirement is to get as close as possible to the real wealth creators. These are profitable companies, especially small, growing companies. Get close to them. Keep your dealing costs down to a minimum and take the long-term view. After all, you will be retired a long time.Happy investing!To take advantage of the research and selection Red Hot Penny Shares is making today, start your one month risk free trial now!

The past is not a guide to future performance. Trades in stocks recommended by Red Hot Penny Shares are small company shares. By their nature, such investments can be relatively illiquid and, as a result, hard to trade. This makes such shares more risky than other investments. Please seek independent financial advice if necessary. Profits from share dealing are a form of income and subject to taxation. Levels and bases of, and reliefs from, taxation are subject to change, and depend on individual circumstances.