Property Market - Is Crime Residential Property's "Public Enemy Number One"?

Private Property South Africa
John Loos

Property Market - Is it possible that crime and violence may give interest rates a good run for their money as residential property’s "public enemy number one"?

Although interest rates arguably remain the key driver of the property market

deterioration, the spectre of crime may be playing an increasingly important

negative role too, especially given the township unrest that has flared up

around Gauteng in recent days. There are many negative forces in residential

property at present, making quantification of the effect of any one factor

difficult if not impossible. But in the former white suburbs of Gauteng,

emigration talk is rife and crime very often features prominently in such

conversations. In addition, in FNB’s Property Barometer surveys, the first signs

of the much talked-about emigration surge may possibly be surfacing in the

numbers, while a significant percentage of sellers sell in order to relocate for

security reasons, underpinning the importance of crime in driving buying/selling

behaviour.

We believe that rising interest rates are probably still "public enemy number

one" in terms of exerting pressure on the residential property market. However,

the gap is narrowing between the importance of interest rates and non-interest

rate negative forces.

In FNB’s First Quarter Residential Property Barometer, released recently, estate

agents surveyed were asked to indicate the factors influencing their (somewhat

negative) expectations for residential property market in the near term. In the

survey, just keeping their nose ahead of the pack were interest rates as the

main driver of near term expectations. However, significant is that the National

Credit Act, in the previous quarter still in the number 2 spot behind interest

rates, slipped back into number 3 position behind the category labelled "general

economic downturn and negative sentiment".

It is difficult to dissect this rather general category of factors, but it

appears to relate to the growing number of non-interest rate related factors

causing deterioration in sentiment. Amongst these would feature the perceived

heightened political and policy uncertainty following the ANC’s Polokwane

conference, which leaves the ruling party seemingly at odds with its own

government, while the Eskom debacle early in the year must have contributed. The

negative effects of a global economic slowdown on the local economy must also

have played a role, while the heightening Zimbabwe crisis and government’s poor

handling of it has not gone unnoticed by many.

But possibly worse than all of the above is the spectre of crime. One can try to

play its importance down or to focus on other factors, but especially in Gauteng,

crime is arguably the greatest fear of the average suburbanite who is

responsible for driving the performance of the residential property market.

Emigration talk, and action, is rife in the suburbs, and my experience is that

crime usually crops up fairly early in any such emigration conversation. Two

quarters ago, in our Property Barometer, we started a survey question asking

estate agents to provide estimates of the proportion of suburban sellers selling

for each reason, and we provided them with set standard categories of reasons as

outlined in the table below. Two categories of sellers whose percentages are not

insignificant are those selling in order to relocate for security reasons,

amounting to 12% of the total number of sellers, while those selling to emigrate

also amounted to 12% of the total in the first quarter. In addition, while 2

quarter’s worth of figures should be interpreted with caution, we saw a rise in

the emigration percentage from quarter 4 of 2007 (9%) to Quarter 1 2008 (12%).

Noticeable was the quarter-to-quarter jump in the emigration percentage in "high

net worth" areas from 13% to 18%.

Reasons for selling Quarter 1 2008

In addition, there is anecdotal evidence of a rise in prominence of so-called

"semi-gration, i.e. re-location to another region of South Africa, and the high

crime of especially Gauteng, and to a lesser extent other major metros, is

believed to be playing a role (although there are many other reasons for semi-gration,

most notably normal career opportunities).

The surveys of reasons for selling suggest that the emigration issue is a little

more prominent in Gauteng compared to the major coastal urban regions. In

quarter 1, 14% of sellers in Gauteng were selling to emigrate, compared to a

lower 9% in the 3 major coastal regions of Cape Town, eThekwini and Mandela Bay

(where the surveys predominantly take place). Moving for security reasons is

also, as expected, a higher 14% in Gauteng compared to 10% in the coastal

regions.

Reasons for selling National Gauteng Coastal

THE CRIME RISK IMPLICATIONS TO RESIDENTIAL PROPERTY PERFORMANCE ARE VAST

Stating the obvious, each household leaving the country due to crime means one

less household in the market to support the demand growth of residential

property. But crime also drives re-location of people within SA, driving

relative performances of regional property markets as well as certain types of

property.

  • Again stating the obvious, in high crime regions such as Gauteng, crime

    gives secure (or at least perceived as secure) cluster living the advantage

    over old fashioned stand alone suburban living. Boomed areas can and do

    often flourish under such circumstances.

  • The high rate of crime probably affects the higher end of the market

    more, as higher income/high net worth households are the best equipped to

    emigrate or to semi-grate and work remotely from their clients or primary

    offices.

  • The Gauteng residential property market is believed to be more at risk

    due to crime, being the high crime region, with demand growth possibly being

    hampered a little more by higher rates of emigration and semi-gration away

    from the region compared to the other major regions. The recent township

    unrest further fuels perceptions of an unsafe region, even for suburbanites

    who are as yet not directly affected.

  • Lower crime and good lifestyle regions such as the Southern Cape could

    be benefactors of high national crime rates due to their potential appeal as

    semi-gration destinations in years to come.

But the direct impact on residential property demand growth, due to people

either re-locating within the country or emigrating, is only part of the story.

Indirect impacts are also potentially significant.

  • Given that higher income/highly skilled people are the ones that drive

    economic growth and job creation in a modern economy (and are in many

    instances in short supply in SA), the fact that high crime drives a portion

    to foreign shores and curbs SA’s appeal as an immigration destination

    contains economic growth, job and income growth and thus residential

    property demand to some degree.

  • Crime also hinders the improvement of lifestyles in the major metros.

    Public transport is often perceived as unsafe due to crime, promoting

    congestion by private vehicles, while living in close proximity to open

    spaces is often seen as unsafe, risky and problematic rather than as a major

    lifestyle benefit. The reality is, high density cities with a lack of safe

    public open spaces and mass public transport will probably not be very

    appealing places to reside. Could such cities compete effectively for skills

    with other global cities? Or could they compete as effectively for skills as

    they have in the past with smaller urban centres in SA?

  • Crime may also contribute to something of an improvement in economic

    performance of certain smaller economic regions relative to the major

    economic regions. Long term economic growth by province is believed to have

    been stronger in the major 3 provinces, namely Gauteng, Western Cape and KZN.

    A smaller region such as the Southern Cape, for instance, is believed to

    have had rapid economic growth off a smaller base, and the combination of

    its lifestyle as well as the repelling force of crime in the major metros

    may boost the region’s ability to attract the skills set necessary to

    sustain high rates of economic growth, thereby boosting residential property

    demand in such a region in years to come.

IS THERE LIGHT AT THE END OF THE CRIME TUNNEL?

There is little denying that crime in South Africa is very high, and that it

could be regarded as a crisis due to its often violent nature. But to make the

assertion that the trend is a "one way traffic" one permanently trending higher

is not necessarily correct. During the current decade, we have witnessed the

official crime statistics showing broad declines in certain categories, notably

murder, rape, car hijackings and car thefts per 100,000 people, although there

has in many instances been some renewed rise in the past year or 2.

Housebreaking, however, appears to have risen steadily through the current

decade, contributing strongly to a feeling of increased vulnerability even

though many housebreakings are not of a violent nature. In addition, it is not a

given that SA will be a high crime country forever. While I do NOT pretend to be

a crime expert, I do believe that anything that goes up can come down, and that

it possible that crime can work in long cycles like many other variables.

Globalinsight Crime Indices

So the situation is complex and far from resolved. But sadly, while crime in

recent years has not all been on an upward trend, and while there may even be

some encouraging signs in the form of demographic trends possibly related to

crime, for many suburban people all that matters is that crime is far to high,

looks likely to remain so at least for the foreseeable future, and they have had

enough. This poses a major risk to the future performance of residential

property both directly, through driving emigrants out of the market, as well as

indirectly, through restricting skilled labour supply and therefore economic

growth and job creation.

IN SUMMARY

Although it is to early to draw hard and fast conclusions about the extent of

emigration, anecdotal evidence is that there is a surge in the emigration rates,

and indeed FNB’s Property Barometer suggests a jump in emigration-related

selling of property, especially on the high-priced end, from quarter 4 2007 to

quarter 1 2008. Crime features prominently in much of the emigration talk.

In FNB’s Property Barometer for the first quarter, the deterioration in

sentiment due to non-interest rate factors overtook the National Credit Act

(previously a close second in importance behind interest rates) in importance in

driving estate agents’ somewhat bearish view of the near-term performance of

property. I believe that crime probably plays a key (though not solitary) role

in this sentiment deterioration.

Crime, although having been very high for many years, appears to have become

more of a concern lately, helped on by some high profile violent acts, and as

such it appears to have become more of a risk factor for the residential

property market. It is arguably more of a risk to the high end former white

suburban residential market. It is also probably more of a risk to Gauteng’s

market than elsewhere, and could ironically boost the likes of the Garden

Route’s property markets through supporting the "semi-gration" drive out of

major metros.

Fortunately, like many other things crime appears to run in cycles, but often

very long cycles. I believe that it is possible that the high crime situation

can be improved in years to come, and that at least when the host of other

negative forces subside, the focus on crime may subside somewhat too. At

present, however, the weakening phase in the residential property cycle is being

influenced by far more than just interest rates, despite the best efforts of the

SARB.

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