Property market faces ‘grim’ period but ‘it’s not all doom and gloom’

SOUTH Africa’s downgrading to junk status has sounded warning bells for the South African economy, and property owners as well as buyers are considering its implications.

Its major effect on consumers in general is that interest rates will inevitably rise, says Erwin Rode, CEO of Rode and Associates.

“And if they do not rise sufficiently, inflation will run away… High interest rates are bad news for house prices as they affect affordability. Stagnating household incomes and growing unemployment also affect affordability.

“Banks that grant 100% mortgage loans, particularly for what is known as ‘affordable housing’ are playing with fire.”

And as the demand for commercial and industrial space will be blunted by low economic growth as a result of the downgrade, Rode says there is not only the danger of growing vacancies and a stagnation of market rentals, but “capitalisation rates heading north”, leading to declining market values.

“Those keen on property as an investment should consider real estate investment trusts with substantial foreign cash flow. The only problem for high-income individual investors is that the distributions are taxed like interest.”

But Rode adds: “The above is only a scenario. Things could turn

priced in’ – Seeff

out slightly differently.”

Emerging from junk status may take the country between five and seven years, assuming the country does all the right things, says Chris Gilmour, investment analyst at Absa Wealth and Investment Management.

Until then, consumers with loans – vehicle, home and personal loans – will be under increasing pressure.

“We could conceivably be paying 2% to 3% more to service this debt… We will see no proportionally linked wage increases in the near future and the ability of the average consumer to repay their debt is going to be hugely compromised.”

This is a “grim” period for the property market, and the country, says Francois Venter, director at Jawitz Properties.

“Many South Africans are already over- indebted, and this latest development is likely to lead to further pressure on households in the short to medium term.”

Potential property buyers will also be affected, says Adrian Goslett, regional director and CEO of Re/Max of Southern Africa.

“Increased cost of credit will dampen consumers’ desire to purchase large-ticket items such as property and vehicles. Prospective homebuyers have already been subjected to interest rate hikes, drought-driven food price inflation and rising electricity tariffs.”

But while there is concern over the downgrade, Samuel Seeff, chairman of the Seeff Property Group, says it is not all doom and gloom. Thanks to the threat having been there for the past 18 months, the effects of the downgrade have already been priced into the current trading markets.

“We therefore expect the property market to remain stable for the time being, with any real effects only filtering through later in the year… For now though, there is no need to panic.” Impact on the property market:

Interest rates on home loans and other loans, will increase.

Higher interest rates will make homes less affordable.

Even “affordable housing” could become unaffordable for many.

A 100% mortgage loan might no longer be granted by banks.

A danger of commercial and industrial vacancies.

Stagnation of commercial and industrial market rentals.