Brexit could have a knock-on ef­fect

Buy­ers will have to fac­tor in pos­si­ble ris­ing in­ter­est rates and en­sure they have fi­nan­cial cush­ion­ing

Weekend Argus (Saturday Edition) - - PROPERTY -

LAST week the UK shocked the world by vot­ing to leave the EU. Many na­tions, in­clud­ing South Africa, are now ask­ing how this de­ci­sion will af­fect their economies and mar­kets in the fu­ture. With the UK a trad­ing part­ner to many na­tions, there is likely to be some ef­fect, even if it is only mar­ginal.

Adrian Goslett, re­gional di­rec­tor and chief ex­ec­u­tive of RE/MAX of South­ern Africa, says it will be in­ter­est­ing to see how Brexit af­fects the South African econ­omy and more par­tic­u­larly the hous­ing mar­ket.

“Ev­ery­thing is merely spec­u­la­tion as we are en­ter­ing un­char­tered ter­ri­tory with no na­tion state ever leav­ing the EU. In the past week there has al­ready been an im­pact on for­eign cur­rency, which has been be­hav­ing ex­tremely er­rat­i­cally.”

Goslett says that be­cause South Africa is highly re­liant on im­por­ta­tion of goods, the ef­fect on for­eign cur­rency could bring about fur­ther in­fla­tion pres­sure as the rand weak­ens.

“We will es­sen­tially be im­port­ing in­fla­tion,” says Goslett. “A sus­tained weak­ened rand will also place fur­ther pres­sure on the Re­serve Bank to in­crease in­ter­est rates. There is no doubt that in­ter­est rates will con­tinue to climb, which will also re­duce po­ten­tial home buyer’s af­ford­abil­ity ra­tios. Buy­ers will have to fac­tor in the ris­ing in­ter­est rates and en­sure they have some fi­nan­cial cush­ion­ing.”

Goslett says one re­sult could be that many first-time buy­ers hold back and adopt a wait- and- see ap­proach un­til the full ef­fects of Brexit on the SA econ­omy are re­vealed. This is usu­ally the case dur­ing per­ceived in­sta­bil­ity in the mar­ket.

“An­other ef­fect that we could see is a rise in the cost of credit. Usu­ally dur­ing pe­ri­ods of global eco­nomic un­cer­tainty, banks be­come risk averse, tight­en­ing their lend­ing cri­te­ria. As a re­sult, ac­cess to fi­nance be­comes in­creas­ing more dif­fi­cult, as more strin­gent global lend­ing cri­te­ria are placed on the banks them­selves. Not only will it be harder to get credit from a bank, it will more than likely be more ex­pen­sive, which will af­fect con­sumer af­ford­abil­ity lev­els,” says Goslett.

Head of home loans at Stan­dard Bank, Steven Barker, says that al­though it’s too early to con­fi­dently pre­dict the im­pact of the Brexit out­come, it has added fur­ther un­cer­tainty to the SA prop­erty mar­ket.

“Con­sumers can ex­pect to con­tinue to face pres­sure on house­hold fi­nances in a ris­ing in­ter­est rate cy­cle. Neg­a­tive moves in the cur­rency mar­ket could lead to higher in­fla­tion which could put in­ter­est rates un­der fur­ther pres­sure,” he says.

“We will have to wait and see how this un­folds, but con­sumer con­fi­dence re­mains low and the prop­erty mar­ket is start­ing to ex­pe­ri­ence a slow­down in ac­tiv­ity. Lend­ing ac­tiv­i­ties by the mort­gage providers re­flects the in­ter­est rate cy­cle and the de­te­ri­o­rat­ing eco­nomic out­look.”

Goslett be­lieves that Brexit will have no im­pact on prop­erty prices, but the mar­ket is cur­rently in a tran­si­tion pe­riod with mo­men­tum shift­ing to­wards buy­ers.

“This is more a re­sult of do­mes­tic con­di­tions than any ex­ter­nal for­eign fac­tors. The shift will cause prop­erty prices to stag­nate for the time be­ing. How­ever, that said, op­por­tu­ni­ties of­ten re­veal them­selves in times of change. Those who can iden­tify the chang­ing dy­namic early on will be able to reap the ben­e­fits and take ad­van­tage of what the mar­ket has to of­fer,” Goslett says.

Stu­art Man­ning, chief ex­ec­u­tive of the Se­eff prop­erty group, be­lieves the SA prop­erty mar­ket is set to re­main pos­i­tive in the wake of Brexit and the im­pact is likely to be far less than per­haps thought of.

“Cer­tainly it will have less of an im­pact than in the UK. It may even fur­ther en­hance SA’s al­ready at­trac­tive prop­erty propo­si­tion for in­vestors.

The an­nounce­ment that Bri­tain was to leave the EU fol­low­ing the ref­er­en­dum held on June 23 sent the rand into freefall against the US dol­lar and it dropped in value by just short of 9 per­cent to a level even lower that the “Nenegate” in­ci­dent of early De­cem­ber. By mid­day, how­ever, the panic had sub­sided and the rand re­cov­ered.

What this shows, says Man­ning, is that there tends to be an ini­tial panic be­fore the mar­kets set­tle down again.

“SA al­ready faces cur­rency volatil­ity, es­pe­cially as it is linked to the emerg­ing mar­kets and what tends to hap­pen now is that emerg­ing mar­kets have lost a bit of their shine for in­vestors who, as we saw in the past week, would look to shift their funds to safer havens. Part of the drop in de­mand and value could also be at­trib­uted to some cur­rency trad­ing and profit tak­ing.

“The im­pact will of course be felt in the UK and in Europe, but as far as SA is con­cerned, lead­ing lo­cal econ­o­mists ex­pect Brexit to have far less im­pact and no more than the chal­lenges al­ready faced as an emerg­ing econ­omy.

“We may well see a fall-out from Brexit in the form of a fur­ther weak­en­ing of the rand and with that, ris­ing im­port costs, higher in­fla­tion and a re­sul­tant in­ter­est rate hike as the Re­serve Bank would look to step in to stem the tide.

“As we are al­ready in an up­ward in­fla­tion­ary and in­ter­est rate hik­ing cy­cle, this could add fur­ther pres­sure. Hav­ing said this, the re­cent CPI data was bet­ter than ex­pected, and it looks as if we will get an­other in­ter­est rate breather when the MPC meets in July. But this will de­pend on how the rand be­haves in the fall­out from the Brexit de­ci­sion.”

He says the ex­pec­ta­tion is that Brexit will bring about no greater eco­nomic risk than SA is al­ready deal­ing with such as the threat of poor eco­nomic growth, ris­ing in­fla­tion, ris­ing in­ter­est rates, a weaker rand, shrink­ing house­hold dis­pos­able in­come and ris­ing cost of credit and home own­er­ship.

“Much of the eco­nomic chal­lenges that SA faces are be­yond our con­trol and re­late to the struc­ture of the econ­omy, drop in de­mand for com­modi­ties and an over­all slow­ing of the emerg­ing mar­ket economies and in­ter­na­tional in­vest­ment shift­ing out of emerg­ing mar­kets,” says Man­ning.

“A vi­tal ef­fect on the whole though is what peo­ple think as much of the econ­omy and prop­erty mar­ket is sen­ti­ment driven. And that is some­thing the econ­omy is cur­rently grap­pling with, both con­sumer and busi­ness con­fi­dence are at his­tor­i­cally low lev­els right now.

“Hav­ing said that, what we have seen over the past few months is that peo­ple are read­ing more gloom and doom than the re­al­ity. Mar­ket com­men­ta­tors who have pre­dicted se­ri­ous gloom and doom for the prop­erty mar­ket have had to back-track a lit­tle as none of the dis­as­ters pre­dicted have yet be­fallen the mar­ket.

“In fact, we have seen an ad­mis­sion that the mar­ket is still well-bal­anced as South Africans just take the chal­lenges in their stride and con­tinue about their daily lives, work­ing and buy­ing and sell­ing prop­erty as they need to or want to.

“Save for ob­vi­ous ex­cep­tions such as the min­ing towns where a drop in this eco­nomic sec­tor has di­rectly af­fected jobs and the de­mand for prop­erty, the mar­ket con­tin­ues to turn quite nicely and con­tin­ues to grow,” says Man­ning.

He cau­tions buy­ers and sell­ers against pay­ing too much at­ten­tion to naysay­ers. The flip­side of Brexit could well be that a weaker rand brings more tourists, in­vest­ment and prop­erty buy­ers.

“The SA prop­erty mar­ket is still on solid ground and real es­tate con­tin­ues to be viewed as a sound in­vest­ment, even dur­ing rel­a­tively poor eco­nomic growth as we have seen over the last few years.

“While the econ­omy man­aged only about a 1 per­cent to 2 per­cent growth rate in re­cent years, prop­erty val­ues in many ar­eas are now 30 per­cent to 50 per­cent higher com­pared to five years ago. In high pro­file ar­eas such as Cape Town’s At­lantic seaboard and City Bowl for ex­am­ple, prop­erty val­ues have in some in­stances prac­ti­cally dou­bled since 2010,” says Man­ning.

“Where we once thought that a prop­erty sell­ing for R20 mil­lion was head­line news, we are now see­ing prop­er­ties sell­ing for up to R100m and at al­most R300m on the At­lantic seaboard. We be­lieve South Africans are likely to take this in their stride.”

Dr An­drew Gold­ing, chief ex­ec­u­tive of the Pam Gold­ing Prop­erty group, says that al­though Bri­tain’s “leave” vote came as a sur­prise to some, the ram­i­fi­ca­tions for the SA econ­omy and prop­erty mar­ket, are not im­me­di­ately clear.

“It’s go­ing to be such a dif­fi­cult one to call as it is go­ing to take time for the full im­pli­ca­tions to be as­sessed. What does seem clear is that the process will take at least two years with many twists and turns along the way and with spe­cific ne­go­ti­a­tions in the EU on many is­sues still to be de­cided.

“Some points of de­bate in­clude whether Bri­tain’s exit will re­sult in short or medium term pound weak­ness and in the process make Lon­don prop­erty po­ten­tially less ex­pen­sive and rep­re­sent a buy­ing op­por­tu­nity for in­vestors.

“On the flip side the at­trac­tion of SA prop­erty to Bri­tish and Euro­pean in­vestors is likely to re­main un­changed al­though a weaker pound will make it slightly more ex­pen­sive, how­ever, at this stage this ap­pears to be mar­ginal.

“What Brexit does, how­ever, seem to have cre­ated in the short term is some in­sta­bil­ity and un­cer­tainty in fi­nan­cial mar­kets, which could have some macro-eco­nomic ef­fects and lead to a fur­ther rand weak­ness given that the in­evitable flight to safe havens sel­dom in­cludes SA.

“How­ever, over­ar­ch­ing all of this is the in­dis­putable fact that with un­cer­tainty comes op­por­tu­nity and as­tute in­vestors will see this op­por­tu­nity and cap­i­talise on it. In par­tic­u­lar, SA prop­erty re­mains un­der­val­ued com­pared to in­ter­na­tional lo­ca­tions such as Lon­don or Paris specif­i­cally, when com­par­ing like with like, and so this con­tin­ues to rep­re­sent a favourable buy­ing en­vi­ron­ment not­with­stand­ing the un­cer­tainty around Brexit,” says Gold­ing.


With the UK vot­ing to leave the EU, over­seas mar­kets and in­vest­ment – in­clud­ing South Africa – are sure to feel some reper­cus­sions.

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