Well, the upside of this sorry tale is quite simply that it can only get better. “Oh, tell us another one Pollyanna,” the cynics grumble. They’re justified in being skeptical. So we asked a bunch of clever folk with pedigrees as fancy as Harvard professors to explain, in simple speak, what’s happening in the market.
First off, Doret Els, an economist from the Efficient Group says property prices took off in South Africa around 2001-2002 and reached dizzy heights about three years later. Most people soon realised the price of their pondokkies had increased by at least 30%, but this economic vibrancy was matched by consumer inflation: we all shopped too much. So Tito Mboweni, the boss of the SA Reserve Bank, increased interest rates by 5% between June 2006 and October 2008 to put the handbrake on the shopping sprees. This is just as well. If he hadn’t South Africans might have been in the jam like our cousins in the US whose financial indiscretion fuelled a global economic melt-down.
Els says with interest rates coming down in South Africa, the property market will improve. It will take about a year because of the lag, Els predicts, but it will get better. “The outlook for the property sector is no-doubt positive.” Andrew Watt, Director Business Development from property specialists Lightstone says the residential market is depressed but not in a crisis, unlike some foreign markets. “Sales volumes are significantly down from their peaks in mid 2007. This is mainly driven by about a 50% drop in mortgages granted as the availability of finance has decreased and the cost of loans has become more expensive.”
Lightstone research shows the drop in house prices and notes that the only property segment showing any strength are properties priced below R250, 000. Doret Els says the South African economy is marginally better off than the rest of the world. Local business should pick up in the third quarter of this year, whereas only in 2010 in most other places around the globe. So, it’s not all doom and gloom.
Watt says the South African property market is “definitely not in as much difficult as US or UK”. He says South Africa isn’t directly experiencing a financial crisis but is affected by a general slow down in GDP growth across the globe.
“As a result local forces are playing a more significant role in our property market than global forces. We still see demand for housing in the affordable market as people move up the income ladder and enter the property market. Banks are also becoming even more active in this market. This inherent demand for housing is helping to prop up our property market and as a result we have seen prices overall only drop by single digit percentage points while in the US and UK prices are as much as 30% down.”
Watt says interest rate decreases in South Africa are good news, but he believes they won’t have an immediate effect on property prices or the number of bonds approved. “I think the availability of financing will remain the main factor influencing the property market this year. The affordability tests and lower Loan to Values granted by lenders makes it much harder for buyers to access cash for purchases. “The interest rate cuts and a drop in inflation will gradually improve the affordability picture and reduce the bad debt for lenders. This could lead to more aggressive lending by the banks which will then result in a turn in the property market. “It is difficult to judge how quickly this will happen but I would be surprised to see a turn before the end of 2009,” Watt says.
Property economist Francois Viruly says 2009 will be a difficult year. “But, there are clear indications that interest rates will decline during the course of the year and that bodes well for us. There are also indications that the buyers and sellers are increasingly meeting each other – even if it is at prices lower than a year ago. The residential property market should start seeing an improvement in the second half of 2009.”
Viruly says the global economy will have a negative impact on the demand for South African commodities, so the health of the world economy is important for local property. This is a bit of a mixed bag for property owners.
Nedbank’s economists Carmen Altenkirch and Dennis Dykes say commodity prices are unlikely to recover in the short term which will affect global demand and the South African economy. Commodities are raw materials that are used in factories to create the products consumers buy. Gold; oil, silver and wheat are examples. Nedbank’s economists say the latest building industry figures continue to show that the construction industry is under pressure, which should reduce the price of bricks, iron and steel and other building materials. This will also affect property prices.
Jacques du Toit, Senior Property Analyst at Absa Home Loans says economic growth in South Africa slowed to 0,2% towards the end of last year because of the slump in the mining sector. He expects economic growth to be about 1% this year. Du Toit says in 2008 house price growth slowed and the bank put the average price of an affordable house at R283 500; a middle segment house was R965 700; and a luxury house R4, 5 million. Du Toit says in nominal terms, house prices are forecast to drop by about 2, 5% in 2009.
John Loos, FNB Home Loans Property Strategist says that while there are encouraging signs for the residential property market, house prices will still come down. He says declining interest rates will create some stimulus for the economy it won’t change the fact that the world economy is in a slump. “But, being a very interest rate-sensitive market … residential demand is expected to respond positively (albeit gradually) to the expected series of interest rate cuts despite weak economic growth.” There will be more bonds approved and the lag of repeated interest rate cuts in South Africa will take effect and start to mop up the oversupply in the residential market.
Else has this to say: “The current property market is definitely not a good time for sellers but is definitely positive for buyers…there are some lucrative opportunities, especially for first-time home buyers to start dipping their toes in the market as sellers are more likely to compromise on their asking prices.” Watt agrees: “It is clearly a buyers market at the moment. Property is best viewed as a long term investment so those able and willing to buy now will in all likelihood benefit from really good capital growth over the next 5-10 years.”