The Seven Year Itch

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06 Feb 2007	Article by Gina Schoeman

The Seven Year Itch: What to do with your 'property-relationship' in 2007.

Married or not, you're likely to have heard the warnings of the seven year itch. In a marriage, it is thought that the seventh year anniversary brings with it a small helping of trepidation, a pinch of complacency and above all, a large dosage of consolidation. Similarly, the seventh year in this decade's property market hints to bring about a certain period of consolidation after some very comfortable years of becoming rather intimately acquainted with booming property prices.

The official meaning of the idiom, the seven year itch, is that of the inclination to become unfaithful after seven years of marriage. If one applies this to one's marriage to the property market, it may be suspected that some individuals may feel inclined to shift away from property and into other asset classes (such as, for example, the equities market). I am, however, about to take on the role similar to that of a marriage counsellor to explain the advantages of remaining in the property market over this period of consolidation, even though the itch may at times seem unbearable.

The graph to the left depicts the cycle that South African house prices have followed from 2000 to 2006. It is clear that the trend has been exceedingly positive throughout these years, while the recent decline in house price growth continues to remain above growth levels at the start of the decade. It is expected that during 2007, although growth will not reach the historic highs of 30%, it will remain on a path of stabilised growth. The most recent data shows that house price growth has decelerated to single digits of 6.24% year-on-year in December 2006 from the double digits experienced in the first six months of 2006. This single digit growth is expected to remain throughout 2007 as the combined increase of 200 basis points in interest rates in 2006 begins to impact the demand for housing. A phase of great growth in a market often requires a period of consolidation whereby the consequential wealth creation is able to be absorbed completely. It is for this reason that 2007 is expected to bring about a solid perspective on the future of property prices in South Africa.

A few factors have dampened house price growth, and for good reason:

• Interest rates were hiked four times during 2006, thus stabilising the demand for housing due to the debt repayment becoming more costly;
• The natural incidence of first-time homebuyers migrating into the housing market has been stalled in some circumstances where the individuals find the housing market too expensive, thus remaining in the rental market in anticipation of their income levels rising; and finally,
• The anticipation of the National Credit Act, to come into effect in June 2007, plans to bring together increased transparency to both the lender and the borrower, thus initiating a stricter form of credit control, while at the same time, more responsible participation in the credit market.

It is expected that following a period of consolidation in 2007, the following year will once again see property price growth move into double digits as demand and supply catch up with one another. For this reason, it is expected that this market will continue to be highly beneficial for investment purposes, attributable to the historical high returns conducive to owning, managing and understanding property.

In respects to the seven year itch, although some individuals understand the long-term benefits of participating in the property market, others may well look toward greener pastures and the instant gratification of higher returns. However, when shifting one's investments out of property (or, scratching that itch) a thorough assessment of the risk involved is required. Knowledge is power, and for that reason, some of the most powerful property players remain in the property market despite cyclical downturns and upturns. Why? Because knowledge and experience brings about a certain competitive advantage that increases the proficiency with which the investor both manages and understands the properties they own. The main advantage to a property is the ability to leverage one's investment or, put simply, to be able to borrow to help fund the purchase of an investment property.

Further, the return on property is two-fold:
1. Rental income is generated; and
2. Growth in the value of the property.

In conclusion, property cycles will go up and will come down; these are simply the natural adjustments through which all markets move. Similarly, the joys of a marriage will have its highs and lows and, although the seventh year anniversary may not necessarily bring about the exhilaration of the honeymoon originally experienced, the benefits and experience gained are far more deep-seated. 2007 may not necessarily bring about the previous highs experienced in the property market, however, similar to the richness that comes from a marriage that lasts a lifetime, the benefits accrued from a long-term position in the property market can not be argued with.