Properties in the luxury market have in the past proven to be more shielded to downturns because buyers very often use more cash when acquiring the properties. That means when interest rates rise, homeowners are largely unaffected. That’s not the case with middle-income categories – which have been particularly hard hit due to their high debt exposure. According to Absa property economist Jacques du Toit, debt levels last year reached an all-time high, thanks in part to rising interest rates, in turn bringing the household sector under severe financial pressure.
As for luxury properties, their prices continued to rise every quarter from 2007 through 2008 – until the fourth quarter, that is. According to Absa, these homes – generally categorised as properties valued between R2.9m and R10.7m – increased in value from R4.3m in quarter one of 2008, to R4.6m in the third quarter. But prices fell 1.7 percent in the final three months of the year, to R4.498m by year end.
For the year, those living in the country’s dearest homes actually saw their home values rise 9.1 percent in 2008 – even higher than the 8.3 percent growth seen in 2007. But things don’t look that good when inflation is stripped out of that, with prices coming down 2.2 percent during 2008. Moreover, from the fourth quarter of 2007 to the fourth quarter of 2008, prices fell the most since 2001 – losing 3.9 percent. So what does all this mean for 2009?
Well, according to Absa, things could get worse before they get better in the market. Du Toit says, “Activity levels and prices are expected to remain under pressure well into 2009”. And more homeowners could be faced with the problem of negative equity in their mortgages – when the mortgage you owe on your property is higher than the actual value of the property. But, he says, while all sectors could feel the effects of this, the middle segment is likely to be hardest hit.
He adds, “All of these categories of housing are forecast to bottom in the second half of the year and pick up gradually towards year-end, with levels of activity and prices only markedly improving from 2010 onwards”. But according to FNB property strategist John Loos, those owning South Africa’s most expensive homes may have to wait even longer. Loos says the luxury market has now passed the worst of the downturn. But the market will remain flat for the time being. “The general global environment must start picking up first,” with a recovery set to lift the lower end of the market before reaching luxury homes. According to Loos, that’s because fewer foreigners are buying in South Africa, as they prefer to sit out recessions in their home countries before investing offshore. And even locally, the wealthy will also rein in their spending. Not only will income from their investments disappoint, but their bonuses, too, are set to fall dramatically from previous years.
As a result, while now may qualify as a buyer’s market with prices starting to stabilise, you’re going to have to lengthen your investment horizon before you see any real return. Du Toit says home buyers should be taking a view of five years or more on their property investments – a longer wait for buyers than in previous years.