Stock shortages continue, what could the contributing factors be?

17 February 2015

After the rosy days of 2004/5/6, when the banks were handing out money which ended in the financial collapse of 2009 and there was a complete constraint on the lending of money, things are now beginning to normalise. Although easier accessibility to finance has added to increased sales numbers and average selling prices being experienced in South Africa, there still are, however, serious stock shortages, says Lanice Steward, managing director of Knight Frank Residential SA.

There are various reasons that could be put forward for these shortages, she said.

The first could be the high cost of moving. The transfer fees on a home are sitting at figures around 8% being charged, which means that the purchaser would have to have an extra R80 000 for every million rand that the home is worth. In addition to this there are many “sunk costs” in moving home, such as the cost of minor renovations and repairs to the property, curtains or blinds, the moving company, transfer of items like telephone and ADSL lines, etc., which do have to be added to the overall budget of moving to a new home, said Steward.

In many instances people will take the R400 000 that would be spent (in various costs on a R5 million home) and put it into a major renovation of their existing property instead of moving house, which makes financial sense, she said. This trend is patently obvious when one drives around certain areas of Cape Town such as Camps Bay, Rondebosch, Sea Point and Claremont, where there is continual upgrading taking place.

This is confirmed by John Loos’ FNB Property Barometer report on residential maintenance and upgrades, where he reports that the percentage of homeowners undertaking “value add” renovations has risen from 10,5% of homeowners in the first two quarters of last year to 15,5% in the last two quarters. This percentage has risen steadily from the low of 3% of total homeowners in the 1st half of 2013, said Steward.

The second contributor to the shortage of stock is a lack of those wanting to move being able to get the finance they need. There is increased trend in people working as freelancers or contract workers from home, and they find it very difficult to qualify for finance as well as the requirements to be able to apply being irksome and time consuming, she said. (Self-employed people need to produce two years’ worth of audited financial records as well as bank statements.)

The lack of growth in the economy over the few years has translated into a lack of salary increases and lack of bonuses (which in the financial sector in boom times were huge sums of money). People tend to have to work harder for their money at present, said Steward, and add this to the increases in household expenses such as higher school fees and grocery costs, it makes it more difficult for people to upgrade and sell, but better for them to stay put.

If a home is near good schools, the accessibility (in both being able to get the child to school and back as well as being in the school’s catchment area) has made it all the more important to remain in an area for a certain amount of time. In the past there was a seven year cycle of people moving in and then selling to upgrade or move area but this cycle has now increased to thirteen years, which again, means less stock available to sell, said Steward.

Another factor contributing to the dire stock shortages is an increase in people buying to let, looking in the long term, in order to grow their wealth and income stream for retirement, which then takes the home which might have been in sales market and places it in a renting category, she said.

“While this does help those who need to rent because they cannot get mortgage finance, it exacerbates the shortage of stock.”

Decreasing numbers in those downscaling due to financial pressure, which has been prevalent in the last few years, has also contributed to the lack of stock being fed into the market, and this category has been added to by older owners also holding back on their downscaling and a new trend forming where their children move in with them and build a “granny flat” on the premises for the older couple to live in, said Steward.

“The stock shortage has resulted in properties reaching higher prices than they did a year ago. However, it is not a sound reason for a seller to overprice their property as the market, although it will pay more, will not pay absurd prices. The sellers must realise that there will be the same implications as there have been in the past if a seller overprices a property. It is on the market for a long time, their property gets a stigma and the seller might achieve a lower real price in the end,” she said.