Fixed property is subject to a number of factors that have a direct influence on the price and value. Property is a very sensitive asset class in the investment market, where changes in the political, social and economic conditions play a huge role on the market conditions and the valuation of property. When compared to the inflation rate, property growth has over time outperformed inflation, leading to positive real return figures. This makes property a necessary and an attractive asset class when making investments and building an estate.
Effects of the interest rate
Although there are similarities to the commercial market, the focus of this article is mostly in the residential sector.
Factors that play a significant role, especially in the residential property market, are the interest rates and the availability of mortgage bonds (loans). The amount that a buyer can borrow directly correlates to the interest rate charged on a mortgage loan.
It is increasingly difficult for young people to buy houses and the statistics have shown that the average age of a first time home owner has increased over time.
More factors that play a role on property valuation
The result of high crime rates, causing the movement away from standalone homes to cluster developments, the latter of which offer security services to a greater of lesser extent, has an impact on the property market that cannot be ignored. It had the result that standalone houses have become less popular, driving these prices down, whereas security complexes have become increasingly popular, driving these prices up.
Similar to the stock exchange pricing also heavily relies on supply and demand. Availability of property or the scarcity thereof has often caused price fluctuations in the property market.
We are typically experiencing this in the Cape Town Metropole currently, with people from abroad for the past number of years taking up the opportunity of the exchange rate being in their favour. It offers good value for money, making properties in Cape Town and surrounds particularly affordable and attractive to them.
The effect of the inflow of people to the Western Cape
Furthermore the Cape Town Metropole is experiencing an influx of people from all over South Africa. This is mainly due to the expectation of people to escape from high crime rates in some other parts of the country and in some instances also to try and beat the unemployment rate of 26% and higher in certain areas where they come from. The Western Cape holds the promise of fairly stable economic activities, based on a strong agriculture and export sector.
The effect of this ‘semigration’ to the Western Cape, showed an increase in the demand of property to purchase, as well as in the rental market. The effect of this is that the house prices, as well as rental prices accelerated above those of the rest of the country, whilst it is becoming increasingly difficult for potential clients to find available houses to buy or to rent. When screening potential clients to comply to the conditions of the Credit Act, these clients find it more difficult to find affordable housing that meet their need and standards. This led to the popularity of smaller and lower priced units, especially in security complexes.
It is noteworthy that the unemployment rate in certain areas could have a negative impact on the property market.
A fact that cannot be ignored and that might have an influence on house prices is the effect that the new Municipal Planning Tribunal (MPT) Cape Town, established in October 2015 will have on the development of land in the future. The Spatial Planning and Land Use Management Act (SPLUMA) 2013 made MPT’s mandatory in all provinces. This was implemented to address and phase out inequalities from the past. Factors that will play a role in the reasonable decision of possible land use, will include the social and economic impact, the impact on heritage, capital investment and the impact on traffic, as well as the impact on property values.
Property as an investment
Two important calculations to consider when purchasing property as an investment and letting it for an annuity income, is the capital growth on the property and the value of rental income over time. This could be played off against the costs, including possible gearing in the form of a mortgage loan, before establishing profit.
Property values are most definitely highly influenced by location. It is of crucial importance for a potential buyer to take into account what the development plans of the Department of Environmental Affairs and Development Planning, as well as City Council are for the immediate environment and the resulting potential impact of the proposed development and infrastructure on property values in the area.
Source: FNB Property Barometer – House Price Index 1 June 2017
What elements finally drive the valuation of property?
The property value will also depend on the improvement of the land, the layout of buildings, the condition, the size, as well as the possibility of development or expanding the property in future.
It is important to note that property prices are continually fluctuating, with the effect that the valuation could be different from what you originally paid for it. Hopefully the value will be higher, but in reality the result could even be that the value has dropped to below what you have paid for the property.
Potential sellers could run the risk of either pricing themselves out of the market, or alternatively offering their property at below market value and lose out on the transaction.
It is therefore essential to get an expert opinion on the realistic and accurate valuation of the property, before presenting it in the market. This more often than not, lead to fair deals and value for money transactions for all parties involved
A reputable and well established Estate Agency/Property Practitioner is of inestimable value to both sellers and buyers in this process, because normally they have the experience, knowledge and resources to assist clients to make informed and well researched decisions. Contrary to the popular belief, your Estate Agent/Property Practitioner are in most instances saving their clients money in the process.
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