“Point of maximum pessimism” - Now, gone or coming?

Private Property South Africa
Scott Picken

In August 2008 I presented at the Erwin Rode conference in my capacity as CEO of International Property Solutions (IPS), and a fellow presenter Dr Andrew Golding announced that he thought we were at the “Point of Maximum Pessimism” and that things were ready to improve. Unfortunately, predicting the future is virtually impossible and no one knew what was about to hit us in September 08.

However I love the saying, “It does not mean it is the bottom of the market, but it is the point where there seems to be no good news and things just seem to be getting worse.” So my question to you is: have we seen it, is it now, or is it still to come? Many argue the worst is still to come, but I have an overwhelming belief that February was that point. In February, there seemed to be no good news. Governments around the world had poured billions into their economies in an attempt to shore them up, but these policies were finding no traction. The stock markets showed no confidence and continued to reach new lows. In the property market, all confidence had evaporated and even those who wanted to take advantage of the opportunities could not raise finance, causing the markets to fall further! Interest rates were dropped to all time lows around the Western World to stimulate the market, and yet it was having no impact. It was all bad news and everyone sat around waiting and wondering, trying to determine how bad it would get.

And then March arrived, and the news started to turn. Firstly, the government plans were authorised and implemented, the stock markets started to rally and even the concerns of a “dead cat bounce” were allayed as they started to improve. With property, the huge interest rate drops started to take effect. Home buyers once again perceived the great value of property and with the increased affordability many decided now might be the time to get into the market. Investors also began to look at yields in comparison with the borrowing costs and realised that based on the income streams and the great discounts on value available, now was the time to take advantage of the opportunity.

Australia was the first to rally. With a 63% drop in interest rates in 4 months and a First Time Home Owners Allowance of $21 000, the market actually moved to a state of “boom” in the affordable sector. I took a trip to Australia in March, and every single developer I dealt with reported record sales - some even higher than in the peak of the boom in 2007. House builders have reportedly run out of land in cities like Melbourne as they cannot keep up with demand.

In USA in the last 3 weeks of March there was a 78% increase in mortgage applications – a sign of renewed interest in the housing market. The housing crisis, which started in 2006 and led to the Credit Crunch, has caused the rest of the world to go into a tail spin. As US house prices fell, leaving households much poorer, they were unable to buy the goods in other parts of the world. In the same way and improvement in the US housing activity could lay the foundation of a recovery in the global economy.

The market in the UK was dire in February. Property prices had fallen by more than 1% for the eighth consecutive month and there was hardly any finance available. The man in the street was only able to borrow at 70% loan to values, making it virtually impossible to buy no matter how good the opportunities looked. However according to Reuters and Nationwide, house prices rose for the first time since October 2007 in March, rising by 0.9% on the back of some confidence, and more importantly as there was more access to finance. In the last 2 weeks we met with Lloyds TSB and they informed us they were actively back in the market to lend. The government is also putting pressure on Lloyds, Northern Rock and Royal Bank of Scotland to lend up to 90%, which will get the wheels of the property market turning again. We have even noticed a large increase in demand and resulting sales from foreign investors, mainly from Hong Kong and South Africa, where they can get access to finance, understand the discounted values and the great positive income returns.

And then we look at South Africa. Although a lot slower to drop interest rates, which many would argue, is to the detriment of the economy, the Reserve Bank has finally started to take measures and dropped interest rates by 2.5% in the last 3 months. This will start to have an effect on property and has already been noticed with car sales. However 2.5% is only a 16% decrease and not the dramatic decreases as seen in other countries.

In Australia, interest rates dropped from 8.75% to 3.25% since September 08 (5 months) a 63% reduction, USA has decreased from 5.25% (2006) 0% to 0.25%, a 95% reduction and the UK has decreased from 5.75% (July 07) to 0.5%, an 87% reduction, the ECB from 4.25% (Oct 08) to 1.25%, and National Bank of Switzerland and the Bank of Japan have already reduced credit costs below 1 percent. There is talk that prime in South Africa will be between 10% and 11% by the end of the year which is another 3% or a reduction of 35% which will have a great impact on the South African property market, along with the feel good factor of the World Cup 2010, just more than a year away.

In conclusion, the only time you can call the bottom of the market is in hindsight. The best deals are where sellers are at a “point of maximum pessimism” and the question to ask is: is this pessimism starting to lift? I would say the time to act is now and not to wait another day or else you will be like one of the many who still say, “I wish I had bought property in South Africa in 2001!”

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