Why property prices will go down
“We are getting near a price correction. It will be a long period of stagnation and not a shock,” said John Loos, household and property sector strategist at FNB Home Loans last week.
“Many housing market corrections take place slowly in real terms,” adds Loos, “where often over a number of years one gets slow house price inflation, which by-and-large remains below the general rate of inflation in the economy as measured by such common measures as Consumer Price Inflation (CPI) or wage inflation.”
In other words, while house values may be rising in real time, when adjusted for CPI inflation they are declining gradually.
The long haul
So how long will this ‘correction’ go on for?
Loos reminds us real housing market corrections can be particularly long. The previous downward correction in the 1980s and 1990s took place over almost 15 years from 1984 to 1998. But after that the country experienced a massive boom from 1999 to 2007.
Loos adds that while some say that South Africa has already had a “downward correction” since the end of 2007 he would argue that this “process” was not nearly completed. So why haven’t prices fully corrected?
Loos believes this is because the correction was cut short by abnormal fiscal and monetary stimulus across the globe, as well as domestically where government widened its fiscal deficit and the South African Reserve Bank (SARB) cut interest rates to multi-decade lows to “keep the economic party going”. This delayed the full correction.
Now this stimulus is running out. Government has begun to raise taxes more aggressively to narrow the deficit. In the Budget Speech earlier this year income tax hikes were announced. Then there’s a strong possibility that the SARB will increase rates. If you look abroad, the United States is set to do the same thing soon.
Loos adds there is little structural economic change happening in South Africa at present to keep the momentum of that stimulus going. He points to social tensions adding that: “All of this means that we appear destined to be perhaps a 1% to 2% growth economy at best, instead of a 5%+ one.”
Bottom line is that South Africa is going through tough economic times and house prices will soon have to reflect this economic weakness. And if there’s no more fiscal or monetary stimulus then there’s nowhere to go but down.
“We had expected one last postponement of the “correction” to come from sharply lower energy prices early this year, and a resultant boost to the economy. However, against this we have electricity constraints proving disruptive to the economy, while non-energy commodity prices have also fallen, hampering certain key SA exports and thus economic growth. The result has been what appears to be a disappointing start to 2015 economically, and the pace of residential market strengthening has slowed,” says Loos.
He adds: “From here onward, therefore, we don’t see any further obvious economic boosts that could sustain the pace of residential market strengthening of recent years. The market still remains a “comfortable space”, but perhaps the time is near for lower single-digit house price growth, and for the “longer term real price correction” to gradually resume.
A good time to buy?
Even though we are due for a correction in property prices there is still some good news. When asked about property prices in high demand areas, Loos says: “There will always be pockets that don’t see a slowdown. It’s [the house price correction] going to be a slow puncture where some houses in certain areas will outperform. Cities are becoming more centrified. A good school will make sure that certain zones remain in demand. Also properties close to public transport will do well.
He also advises potential buyers to consider smaller more affordable properties, pointing out that we will see more increases in prices elsewhere. “It’s not going to stop with Eskom. Water comes next and it’s going to cost more to own a house. Increases in municipal prices need to be thought of.”
When pressed about whether it’s a good time to buy Loos advises: “If you want an investment property then now is not a great time to buy. That time has come and gone. The time to buy an investment was back in 1998 when prices were rock bottom.”
He adds that potential homeowners consider the entire cost of purchasing a property and not just the purchase price. “Interest rates are very low and the Reserve Bank has said it wants to normalise rates which means they will be going up. You’ve got to look at that and the fact that municipal rates will go up too.”
Strength of WC house prices
Those who have bought property in the Western Cape (WC) still have reason to smile though. “The Western Cape appears to be the strongest of the major provincial residential property markets of late,” says Loos.
The FNB Western Cape House Price Index for the first quarter of 2015 rose year-on-year by 9.2%. This is mildly slower price growth than the 10.7% recorded in the corresponding quarter a year ago, but is the highest price growth of the four major provinces.”
Stats provided by FNB showed that 18% of sellers sold in order to upgrade properties, while 14% sold to downscale to smaller homes due to financial pressure. Loos says that to date there has been little hint of renewed rise in percentage selling due to financial stress.
There are many drivers of this growth in the WC. The province’s economy remains one of the strongest in terms of growth, only slightly behind Gauteng’s growth and keeps its employment and household income growing faster than other regions. It is also perceived as a well-run province with a strong economy and a good lifestyle. The province benefits from repeat home buyers, while the other provinces suffer from fewer repeat home buyers. Foreigners are also tempted by the attractiveness of the province and property in the WC has regained popularity as a global asset class in recent years.
But the province is the most expensive points out FNB, which means it’s become a challenge for first time buyers to get their foot up on the property ladder. This is despite its per capita income being slightly lower than that of Gauteng, the country’s wealthiest province. However, Gauteng is landlocked and therefore suffers less of the land scarcity than does the City of Cape Town Metro Region.
Featured Get personal with your finances – and tie the knot
As time passes, your financial products may not live up to your needs. Therefore, it’s important to take stock of what you’re paying for and adjust where necessary. We got in touch with financial advisers to find out how you can get your finances in order, and what you should do to ensure you’re financially stable.
Personal loan or business loan? The best way to finance your business
When starting your own business, you may have to rely on external funding. Perhaps you qualify for a personal loan, but would it be better to take out a business loan instead? We got in touch with a specialist to find out whether it’s best to take out a business loan or a personal loan to assist you with your ongoing business or start-up.
What to do when you’ve been denied a home loan
After months of scanning property sites and attending showhouse after showhouse, you’ve finally found what you’ve been looking for. But your dream of owning a home comes crumbling down when you receive the news that you’ve been denied a home loan. So, what now?
Best travel cards offered by top South African banks
Planning a trip abroad involves a lot of administration. You need to consider travelling arrangements, reasonable accommodation, and a daily itinerary. But have you considered how you’re going to pay your bills once you arrive? Besides considering bank costs, you also need to consider exchange rates.
Takealot January Big Sale
Price: Available on request
When: Until 31 January 2020
Annique Restore Package Special
Price: From R600
When: Until 31 January 2020
Ster-Kinekor Senior Citizens Discount
Price: Available on request