Weekend Argus (Saturday Edition)
Brexit could have a knock-on effect
Buyers will have to factor in possible rising interest rates and ensure they have financial cushioning
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.