Gina Schoeman, Economic Analyst at Standard Bank, takes a look at how other countries can be used as an indicator of future performance of the South African property market.
It has been said that if the US sneezes, the rest of the world catches a
cold. Recently, however, China sneezed when the Shanghai equity market dropped
8% in just a few days, sending a bad case of the flu through the markets of the
world. Coincidentally, at the same time, the US sneezed back with an
announcement that they may be heading toward a recession. The combined effect of
two of the most prominent and influential economies in the world sneezing
together, left the rest of the world rushing to the nearest 'clinic' for as many
'vitamins' as possible, in an attempt to soften the blow.
Times have changed. The world becomes an increasingly more open market as
economies lower their barriers and global trade continues to speed ahead. No
longer is it possible to analyse one country on its own without taking into
account the effect that the rest of the world has on it. And for this reason,
when examining the South African property market, it is crucial to watch the
dynamics stemming from other economies and property markets around the world.
Recent attention has been drawn to concerns that the US mortgage market is
taking strain. US mortgage loans, known as subprimes, hit a record high in the
number of home loans entering foreclosure by the end of 2006. The fear thus
exists that a rise in the number of foreclosures would deteriorate the value of
houses in the US, thus eliminating much of the real estate wealth that has been
created over the past few years. The causality thereafter is rather
straightforward: should mortgage owners take strain, consumer expenditure would
decline and exports would be impacted negatively. As a result, it is plain to
see that such activity in the US housing market can bring about powerful changes
in the global market. It is crucial for South Africa to keep an eye on these
global property markets, as our economy is classified as that of an emerging
market, and hence, is rather sensitive to external global factors. A sneeze in
the number of mortgage loan foreclosures in the US has the ability to send some
hay fever our way.
On a more positive note, the ability to use other countries as an indicator of
future performance of the South African property market cannot be argued with.
The graph above indicates some of the property markets in the world and their
respective growth paths over the past few years. It isn't difficult to
understand that the more developed an economy, the more likely it is to react
quickly to global factors. For that reason, it can be seen that more developed
economies, such as the UK, moved into the boom phase approximately a year before
South Africa. Although dependent on drivers in the market such as the prime
interest rate level and income growth, this leader-follower effect is a
realistic phenomenon in the world, and a powerful tool when attempting the gauge
the future effect of global economies on our property market.