THE SHORTAGE OF ENTRY LEVEL APARTMENTS & TOWNHOUSES?

25 Jun 2014

Why is there currently such a shortage of entry level apartments & townhouses in the Northern Suburbs of Cape Town? Although there are always a fair number of flats/apartments & townhouses available, only a small hand full of these are "sell-able", reasonably priced and difficult to find. The others, are usually "problem cases", overpriced & with little chance of actually selling. Why is this? What has led to this scenario?

Why is there currently such a shortage of entry level apartments & townhouses in the Northern Suburbs of Cape Town?
Although there are always a fair number of flats/apartments & townhouses available, only a small hand full of these are "sell-able", reasonably priced and difficult to find. The others, are usually "problem cases", overpriced & with little chance of actually selling. Why is this? What has led to this scenario?

Prior to 2003 these entry level apartments were being sold to a wide and varied spectrum of young & old, beginner & investor and everything in between. The growth was slow yet steady and the demand and popularity of these units increased steadily.

Then there was a sudden boom, with apartment prices doubling in 3 years. Investors as well as "opportunists" went into a buy-to-let frenzy, often over extending themselves, re-financing their personal homes and basing their projections on unsustainable capital growth. When this boom was over and the "bubble burst", the market was flooded with properties of owners who had come financially unstuck. The unsustainable prices having dropped, meant that these owners were now stuck with bonds exceeding the value of their properties, re-financing these no longer being an option and these properties ultimately becoming distressed & forced sales like auctions etc.

Of course, once this period had settled down & these bad debts had exited the market, we were left with owners, who had done well with their property values and capital growth having doubled over a short period of time. This left owners who occupy, as well remaining buy-to-let investors with strong equity in their properties and investors with good, ever increasing rental income.

If we remember, that the vast majority of apartments and entry level townhouses are owned by 1st time homeowners & investors, this has however created a supply problem for the following reasons:

-After the "boom" banks became really strict with their lending criteria. -The credit act was implemented at the same time. -The rental demand started increasing. -Rental amounts increased accordingly with rental shortages. -Young homeowner incomes did not keep up with the capital growth of their properties.

What this basically means is that buy-to-let owners that have had their properties for a while, now have an excellent rent to value ratio as young first time homeowners are forced to rent as they do not have the deposits required to enter the market. These buy-to-let investors therefore have cash flow positive properties with a steady stable income & no real incentive to sell these properties.

At the same time, the young buyers who were lucky enough to get into the market before the boom, have good capital growth & equity locked into their properties. However, the reality is that for these buyers to "upgrade" to a house or larger property, they still do not qualify to make the leap, as their income has not kept up with the property growth. The gap between the value of their property & the upgrade they would like to make, has simply become to big. This means that basically they are also forced to stay in their existing property, unless their financial circumstances drastically improve.

Prospective buyers will also notice that many of the entry level properties that are available, are in complexes that were built during the boom, where the high volumes of buy-to-let sales, have often resulted in a less favorable trend emerging in these complexes.

So, both key owners that currently own a major portion of the entry level properties, cannot, or don't want or need to sell.

That's the bottom line.

Flat & Townhouse Specialist - Menno (W)021 910 3300, (C)082 465 1057 menno@webafrica.org.za https://www.facebook.com/Menno.FlatSpecialist?ref=hl