The high cost of housing: Interview with Namene Kalili of FNB

What is the offer-to-purchase system, how does this system affect housing prices?

The offer-to-purchase system is a much lengthier purchase process, where the seller advertises a house at a certain purchase price and the buyer submits their offer at their own price. This process allows flexibility to negotiate price and conditions. On the price side the cost price, transfer duties and agents commission are all documented, where the agent’s commission and the purchase price are negotiable. As for the conditions of purchase, all movables included in the transactions such as electric gates and fencing are documented so that there are no nasty surprises later on.Is competition for scarce erven driving up the price? For Windhoek yes, supply of erven has been low in the past five years or so. Migration to Windhoek and population growth in the city is the other part of the problem where roughly 250 households pop up every month, therefore City of Windhoek needs to sell roughly 3 000 erven a year to meet the current demand, an area roughly the size of Academia.This has not been happening, as last year City of Windhoek auctioned 300 erven. Based on these figures, one can understand why people are becoming desperate for land as the cumulative demand figure increases exponentially each year. Outside Windhoek we find constant supply of land to the extent that municipalities are financing such transactions well below inflation rates and commercial lending rates to stimulate demand. But most of these towns do not provide the same returns to investors as Windhoek.Are prices being artificially inflated?Not really because if you assume building costs of N$5 000 per square metre, you will find that the land costs are at most one fifth of your building costs in Windhoek for a property with average finishes. Therefore the biggest cost component remains the building costs and if you removed the land costs from the equation, housing still will not be cheap for most houses. The land cost is more prominent with houses at the lower end of the price scale where land costs can account for 40% of total costs in the case of Windhoek. But then land on such properties is sold by private treaty and is not subject to the same type of speculative activity we have become accustomed to at land auctions. Are we in the midst of a ‘housing bubble’?I would not think so, because current houses being traded are closer to the city centre and there will always be a premium for the proximity to town. Furthermore, building standards have improved significantly over the past ten years, with top specs available for medium-priced property.Bathrooms have floor-to-ceiling tiling, custom-built cupboards, alarm system and built-in ovens. These features were considered luxuries a decade ago and are often overlooked in house price analysis. The absence of large-scale free-standing housing developments that were common for Rocky Crest, Acacia, Dorado Park, Otjomuise, Kleine Kuppe and Cimbebasia are no longer present in the market where consumers benefited from the economies of scale and experience curve effects from mass production of standardised housing units. The high prevalence of renovations is aggravating house prices as materials for new builds are exempt from VAT and renovations are not. Therefore it is more cost-effective to sell an existing property and buy a larger newly built house.Will this bubble, if we are in one, last much longer?Once we start addressing our housing fundamentals in Windhoek, house prices will stagnate for a while and become affordable for most individuals. But I don’t think there is a property bubble to speak of.What happens when such a bubble bursts?We should not get too carried away with what happened in foreign housing markets in developed economies as their housing markets were characterised by massive oversupply of housing. We in Namibia are nowhere near oversupply and have not been anywhere near oversupply for the past 10 years. Namibia needs roughly 14 000 new houses each year to keep up with population growth. Last year there were roughly 4 000 new bonds registered where most were on existing houses and further bonds on existing houses. Furthermore the American legal system is significantly different from ours, where the risk of default in the US lies with the commercial banks and it is in the consumers best interest to default on house payments when house prices begin to fall and then buy back the same house at the lower price, this is certainly not the case in Namibia. Here the risk lies with the consumers who is liable for the outstanding mortgage loan amount irrespective of the market value. * Namene Kalili is the manager of research and competitor intelligence at FNB