Entry level homes lead the property recovery

“Lower interest rates and the easing of credit restrictions have spurred demand for entry level homes,” says Auction Alliance, Chief Executive, Rael Levitt. In the second quarter, the sector where most activity was recorded is sales under R750 000. This is where markets are most responsive to low interest rates and minimal transfer duties. New housing construction appears to have bottomed out and demand is now outstripping supply leading to a stabilisation in the market at this level.

In 2008 and 2009, the entry-level sector showed the greatest distressed sales activity with the onset of the global downturn and Auction Alliance sold over 5 000 distressed houses in 2009. “This year in South Africa we have seen a sharp downturn in distressed sales in this sector and while distressed entry-level homes led the property market slowdown, it now looks as if it will be this sector that will lead the recovery,” Said Levitt.

Many analysts argue that the property market stabilisation is a temporary, interest rate induced blip and, given the elevated number of vacant homes on the market, a further downward correction of home prices will occur in late 2010 and possibly beyond. The large shadow inventory of yet to be foreclosed homes also poses a risk for downward correction of home prices but there is no doubt that the massive level of house repossessions as experienced in 2009 has slowed down.

Stripping out the volatile leisure market component, single family entry-level homes are showing stronger price increases, and in a country with a chronic housing shortage this is no surprise. Commented Levitt, “We must never confuse our housing market with the US, UK or other developed economies as these countries had an oversupply of homes and thousands of foreclosed homes stand empty. In South Africa homes will never stand empty because of the basic housing demands of our populace. At the top end of the market, particularly in the luxury market, we compete on global terms and right now that is where a decline in confidence lies.”

Most interestingly, the entry-level market is where investors are now getting the best returns because of strong rental demand caused by an under supply of homes. Residential property investors can get double digit yields on entry-level homes, which is better than many other areas of the investment market. “We are seeing our auction floors flooded with investors and end users looking for sub R750 000 houses and apartments in urban areas. We haven’t seen investment activity in this sector of the market for more than seven years but it’s now more active than ever,” said Levitt.

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