For a traditional holiday town such as Ballito the national trends in secondary home buying (as opposed the primary residence buying) is of particular interest as it gives us a sense of the expected level of demand for holiday and investment homes in general.
According to FNB the secondary residential property buying reached a multi-year high of 14.47% of total home buying in the 1st quarter of 2017. This was the highest estimated percentage since the end of 2009. Since then, this estimate has declined mildly to 12.48% by the third quarter of 2017. These levels remain far below the pre-2008 boom time levels, which exceeded 20% at times, according to FNB's latest Estate Agent Survey Report.
A significant category of secondary home buying is the Buy-To-Let category. As of the 3rd quarter of 2017 buy-to-let buying as a percentage of total home buying was 8.23%. This is slightly down on the 9.77% recorded in the 2nd quarter. Believe it or not, in 2004 levels as a high as 25% were recorded at the height of the new housing market boom.
Since 2010 however the rate has been largely flat. This is good news for buyers of buy-to-let properties as you have a good chance of sourcing a good property in a high demand area that will deliver an acceptable rate of return. What is an acceptable rate of return for this asset class
I tend to use 9% as the gross yield before costs as the benchmark return when trying to quickly assess the viability of a buy-to-let property. An interesting statistic that FNB track is the percentage of properties being sold due to lower than expected investment income being generated.
Currently the estimate is at 4.5% for the four quarters ending Sept. 2017. This has increased over the past few months, but is still below the peak of 10.25% estimated of these sales in 2010.
This peak could have been related to the Soccer World Cup frenzy, which lead to people investing in rental stock in anticipation of a surge in demand and sky-high rates, which actually never materialized. By the end of the World Cup and with no prospects of serious rentals, many people may have been disillusioned and would have decided to sell their investment properties.
Another fascinating statistic is the number of investment properties sold at the same price or below which they were bought at. The period between 2009 to 2011 was the ultimate buyers paradise market as this measurement grew to almost 70% of homes.
Can you imagine 70% of investment property owners selling at the same or lower price than they bought at This was mayhem for sellers and a superb windfall for buyers at the time. The trend in these figures was downwards until the 2nd quarter of 2016 and since then, there has been a sharper uptick in the measure of homes sold at or below their purchase price.
From the figures I could see that the bulk of investment properties are sold at a return of up to 10% above the purchase price. A few are sold at up to 20% more and a slightly smaller percentage are sold at up to 30% more.
The estimate that has been provided for holiday home buying is currently 3.3% of total home buying in the 3rd quarter of 2017. This level has remained surprisingly stable.