The Property Market where to now?

There’s an ancient Chinese Curse that states…”May you live in interesting times” it does not say dangerous or ominous times, but just interesting times.

I suppose the choice of the word interesting would simply imply the opposite to boring where nothing changes.

Change of any kind is what keeps life interesting. South Africa is definitely going through some interesting times, not just as a country, a people and an economy, but the Property Market also reflects these interesting times.

Who would want to be an Economist?

I recall recently reading an article written by a well known local economist in which he attempted to predict the future from an economic point of view. His prediction went something like this…On the one hand if X happens then we could see Y results, but on the Other hand if X does not happen then we could see Z results and I remember thinking, Thank Goodness Economists are not Octopuses or we could end up with eight different predictions, such is the unpredictable nature of our current economy.

Normal predictable South African economic conditions are out the window. The international economy is doing it’s utmost to drag it’s weary body out of the 2007/8 recession, yet we have a local economy that seems hell bent on shooting itself in the foot, or maybe even both feet.

Industrial action is driving up labour costs while reducing productivity.

Commodity prices are down, yet labour continues to push for excessive increases or go on Strike leading to thousands of possible job losses in one of South Africans main sectors. We see a similar situation in the Manufacturing sector, in fact all labour intensive sectors are under performing, yet we continue to see labour costs rise well beyond inflation and the resultant job losses that will naturally occur under these conditions.

We have recently passed some ill advised laws that have had a serious impact in one of our few remaining growing industries, Tourism.

At the current exchange rate our Tourism industry should be flourishing, but now we see an industry, that has been steadily growing, not just become stagnant, but in unprecedented decline.

The first 2015 Tourism figures are being made available and it’s not pretty. Instead of achieving a 5% predicted growth tourism is down 6% overall for the first quarter of 2015 resulting in a net loss of a quarter of a million tourists in those 3 months, these figures do not yet include the latest laws affecting travelling with children which is expected to further harm the tourism industry. The net result will be the loss of direct income far in excess of R10 Billion for the year, I wonder how many job losses this will cause.

Tourism is taking a knock.

The poor performance of the Rand should also see the export market taking advantage, but this is not happening, because the manufacturing sector is simply not in a position to take advantage of any increase in demand for our “cheaper” goods.

A weak Rand will result in imported goods costing more and we will see an increase in the price of fuel, a basic commodity that will in effect push up inflation across the board.

Normally we would see the Reserve bank step in and assist the Rand and control inflation by increasing interest Rates, but the Reserve Bank has indicated that not only does it not have the necessary reserves to protect the Rand this time around, but it finds itself between a rock and a hard place, it needs to combat inflation, but it’s hands are tied by a stagnant, even declining, economy that desperately needs a shot in the arm, further interest rate hikes at this point would harm the economy and place indebted consumers under even more pressure.

I believe the Reserve Bank may also realise that current inflation is not necessarily all demand driven, but is also the result of production factors beyond the control of the consumer, increasing interest rates may have limited effect on this type of inflation.

We’re not sure however how long the Reserve Bank will adopt it’s current “wait and see” attitude as R20-R22 to the US $ is not an impossibility by 2017/18, we have already breached R14 once or twice in recent days with the Rand weakening from below R11 to the US$ a year ago meaning we could see the cost of imported goods effectively doubling in a 3-4 year period.

Normally lower interest rates would be an absolute boon to the property market, but despite interest rates being low for some time now, we have seen property sales figures for Cape Town down 10% by volume in the first six months of 2015 when compared to the same period in 2014, but interestingly up in terms of Rand Value as more High End, R20 million plus, homes were sold, it would be interesting to know why so many wealthy individuals sold their properties.

The South African Reserve Bank is caught in a tough position with limited Power to influence the Rand vs Inflation.

Perhaps fewer properties were sold as a result of sellers expecting too much for their properties, we have seen a definite swing of late from a sellers market back to a buyers market, perhaps buyers are nervous as interest rates have increased marginally once this year already leading to people being wary of a repeat of 2007/8 when interest rates peaked in excess of 15%, those days are still too fresh in the memories of many people.

The low interest rates combined with fewer property sales would indicate a lack of appetite for any new or increased debt by the average household as other costs have been rising sharply, placing many households under more pressure just to service their existing debt.

The rising cost of electricity and other basic commodities immediately spring to mind. For many consumers annual salary increases have not been keeping up with inflation over the last few years resulting in reduced buying power, we may be starting to see the effects of this on the Property Market as more people choose to rather hang on to and make do with what they have.

So what do all these economic figures mean for the Property Market, in a nut shell if things do not change, either internationally-locally or both, but primarily locally. South Africans who live and work in South Africa and earn in South African Rands will continue to lose buying power, not just against international exchange rates, but also against local inflation rates.

Property will continue to become less and less affordable to the average South African not just directly as a result of property prices, but more so as a result of other financial pressures on our personal budgets.

We may need to reassess what percentage of our gross monthly income we wish to assign to servicing a bond as other costs start to consume a greater portion of our monthly income.