Property market turns attractive post-downgrade
THE EFFECTS of the ratings downgrades are beginning to hit home, throwing the country into an economic recession. A significant contributor to the decline was the 2.3 percent fall in household expenditure in the first quarter of this year, an indicator of just how much consumers are feeling the pinch. Households are spending less on food and clothing just to keep their heads above water in these difficult times.
The downturn threatens to have a dampening effect on home selling and home buying for the rest of the year. But there are three important factors that are likely to mitigate the effects of the decline, making the residential property market – worth R3.9 trillion and growing, according to research by the Property Sector Charter Council – an attractive investment prospect. The council estimated that the residential property sector accounted for 75 percent of the entire property sector’s value, meaning that what happens in residential property determines the fate of the sector as a whole and its contribution to economic growth.
The first of these factors is the outlook for inflation and therefore interest rates. They determine how much bond holders repay to financial institutions each month. Consumer price index (CPI) inflation has been on a downward trajectory over several quarters. Because CPI is what the Reserve Bank uses in its inflation-targeting regime when setting interest rates, some economists say that it is possible the bank will reduce interest rates later in the year.
Combined with a stronger rand, which makes imports cheaper, this could bring much-needed relief to under-pressure households. More affordable debt repayments and cheaper imports mean more disposable income at the end of the month. And it could also make home loans more affordable to those that were on the borderline, giving a boost to activity at all levels in the market, whether looking to buy or sell your home.
Then there is the chronic shortage of housing, particularly in urban centres. There simply is not enough housing stock overall to meet demand – and there hasn’t been for a while. When you drill down into the detail, it becomes clear that the shortage is most pronounced in low to middle-income suburbs in metropolitan cities such as Johannesburg and Pretoria. This suggests that it is more of a mismatch in certain segments than an overall shortage.
Looking for homes
More people than ever before are living in cities and looking for homes. But the market is struggling to supply at the prices clients are willing to pay in these segments, keeping home prices and rentals up. There is a “sweet spot”, which has ranged from monthly payments of about R7 000 to R12 000 or so, where there is the greatest mismatch and therefore demand.
Houses in this range do not stay on the market for long and typically attract strong interest from buyers and sellers. At the top end of the market, areas such as Sandton in Johannesburg and Pretoria’s eastern suburbs continue to be in demand, no matter the price. And finally, there is technology. The world is experiencing what some have dubbed a fourth industrial revolution. New technologies are emerging and combining in new and exciting ways, leaving no sector unaffected by the disruption. The property sector is no exception.
Companies such as Airbnb are at the cutting edge of the disruption. Reports are that in cities like Durban, Airbnb is allowing bondholders to pay off their home loans in record time – 18 months by some estimates. This is the shortest time period world wide. At 33 months, Johannesburg was not that far behind.
The happenings that herald the fourth industrial revolution mean that it’s only a matter of time until other companies find ways to be as disruptive as Airbnb. Many smart people are at work trying to figure out how to apply the explosion of new technologies in the property sector to deliver better value and services to homeowners and tenants.
Technologies such as solar power and efficient building materials have also been making their way into new housing developments, driven largely by regulation and demand. The Green Building Council, for example, has been driving awareness of these technologies and issuing certifications. And buyers and tenants are becoming increasingly aware that more energy-efficient homes mean lower longterm costs for utilities and other consumables. As a result, South Africa is reputed to be among the fastest-growing when it comes to developing new buildings with these technologies.
It may be that what is happening is that we are catching up to developments in other parts of the world, but these technologies are nonetheless one of the significant factors driving activity in residential property.
So, on the whole, the residential property market continues to look promising. Opportunities abound for developers, agents and financial institutions to meet changing demands and win new clients, even in this tough economic environment. Harry Hattingh is co-founder and principal at Lead home.