The Seven Year Itch

Private Property South Africa
Gina Schoeman

The Seven Year Itch: What to do with your 'property-relationship' in 2007.

Married or not, you're likely to have heard the warnings of the seven year

itch. In a marriage, it is thought that the seventh year anniversary brings with

it a small helping of trepidation, a pinch of complacency and above all, a large

dosage of consolidation. Similarly, the seventh year in this decade's property

market hints to bring about a certain period of consolidation after some very

comfortable years of becoming rather intimately acquainted with booming property

prices.

The official meaning of the idiom, the seven year itch, is that of the

inclination to become unfaithful after seven years of marriage. If one applies

this to one's marriage to the property market, it may be suspected that some

individuals may feel inclined to shift away from property and into other asset

classes (such as, for example, the equities market). I am, however, about to

take on the role similar to that of a marriage counsellor to explain the

advantages of remaining in the property market over this period of

consolidation, even though the itch may at times seem unbearable.

The graph to the left depicts the cycle that South African house prices have

followed from 2000 to 2006. It is clear that the trend has been exceedingly

positive throughout these years, while the recent decline in house price growth

continues to remain above growth levels at the start of the decade. It is

expected that during 2007, although growth will not reach the historic highs of

30%, it will remain on a path of stabilised growth. The most recent data shows

that house price growth has decelerated to single digits of 6.24% year-on-year

in December 2006 from the double digits experienced in the first six months of

  1. This single digit growth is expected to remain throughout 2007 as the

combined increase of 200 basis points in interest rates in 2006 begins to impact

the demand for housing. A phase of great growth in a market often requires a

period of consolidation whereby the consequential wealth creation is able to be

absorbed completely. It is for this reason that 2007 is expected to bring about

a solid perspective on the future of property prices in South Africa.

A few factors have dampened house price growth, and for good reason:

  • Interest rates were hiked four times during 2006, thus stabilising the demand

for housing due to the debt repayment becoming more costly;

  • The natural incidence of first-time homebuyers migrating into the housing

market has been stalled in some circumstances where the individuals find the

housing market too expensive, thus remaining in the rental market in

anticipation of their income levels rising; and finally,

  • The anticipation of the National Credit Act, to come into effect in June 2007,

plans to bring together increased transparency to both the lender and the

borrower, thus initiating a stricter form of credit control, while at the same

time, more responsible participation in the credit market.

It is expected that following a period of consolidation in 2007, the following

year will once again see property price growth move into double digits as demand

and supply catch up with one another. For this reason, it is expected that this

market will continue to be highly beneficial for investment purposes,

attributable to the historical high returns conducive to owning, managing and

understanding property.In respects to the seven year itch, although some individuals understand the

long-term benefits of participating in the property market, others may well look

toward greener pastures and the instant gratification of higher returns.

However, when shifting one's investments out of property (or, scratching that

itch) a thorough assessment of the risk involved is required. Knowledge is

power, and for that reason, some of the most powerful property players remain in

the property market despite cyclical downturns and upturns. Why? Because

knowledge and experience brings about a certain competitive advantage that

increases the proficiency with which the investor both manages and understands

the properties they own. The main advantage to a property is the ability to

leverage one's investment or, put simply, to be able to borrow to help fund the

purchase of an investment property.

Further, the return on property is two-fold:

  1. Rental income is generated; and

  2. Growth in the value of the property.

In conclusion, property cycles will go up and will come down; these are simply

the natural adjustments through which all markets move. Similarly, the joys of a

marriage will have its highs and lows and, although the seventh year anniversary

may not necessarily bring about the exhilaration of the honeymoon originally

experienced, the benefits and experience gained are far more deep-seated. 2007

may not necessarily bring about the previous highs experienced in the property

market, however, similar to the richness that comes from a marriage that lasts a

lifetime, the benefits accrued from a long-term position in the property market

can not be argued with.

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