The decision by international ratings agency Moody’s to place South Africa’s Baa2 bond and issuer ratings on review for downgrade has serious consequences on the short to medium term property market. Richard Gray, CEO of Harcourts South Africa provides insight into the issue.
If South Africa gets downgraded it will be one notch away from junk status and this is not a positon we want to be in.
If this indeed does happen the immediate repercussions will see the rand grow weaker as investors and lenders pull out of South Africa. Many foreign investors are only mandated by their backers and funders to lend in certain markets and a downgrade may trigger a significant number of these mandates to force them to withdraw the investment.
Positive sentiment in our economy assures foreign investors that their investments are stable and that growth is a probability. As soon as international ratings agencies lose confidence in our forecast so too do global investors.
This will undoubtedly force higher interest rates to counter the weak rand and exit of investment. Higher interest rate will reduce affordability for potential buyers. Coupled with this, the consumer will be hard hit with increased prices of most items e.g. electricity as Eskom pays more interest on debt and capex.
Buyer sentiment will turn very negative and even local people will be scared to invest in the country. The high rates, low affordability and negative sentiment will slow the housing market down significantly.
The silver lining is that foreign buyers will find it easier to buy here with the weak rand, but given the small percentage of foreign buyers, this will not reverse the negative trend.
So we really have to hope that Finance Minister Pravin Gordhan can convince the ratings agencies that we are going to be able to stimulate growth and cut spending.
However, as I’ve always maintained, property is a long term bet and therefore usually remains resilient to market fluctuations. These problems will hopefully not be with us for more than a year or two and I foresee our economy regaining stability and growing stronger as time goes by.