Global Markets: Around the World in 80 Seconds

Private Property South Africa
Gina Schoeman

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.

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