Taking The Plunge

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Reasons For Optimism

Much like last year, 2017 is proving to be another year of economic and political uncertainty – both locally and internationally. However, despite a protracted period of subdued economic downturn, the local residential market remains remarkably resilient – in part because investors, faced with unusually high levels of financial market volatility, are increasingly opting for the stability offered by ‘real’ assets like property.

Notwithstanding this, the ‘junk’ investment rating by leading world agencies is an unquestionable blow to the South African economy, hard-pressed consumers – and national pride. But the effects will probably take a while to impact noticeably – and may not be too harsh in the long run if we can get our economic act together.

In any event, the cost of capital is on the rise, meaning lower investment, little job creation, declining investment levels and fewer economic activities. In this context the general effect is a downward pressure on asset prices, possibly including property. From a property perspective demand for mortgage loans has not really faltered. Nor has the fear factor sparked a rush by bondholders to switch from variable to fixed mortgage loans rates. Nevertheless, if the economic outlook worsens the banks will take steps to hedge their risk exposure.

The residential property market overall, however, remains buoyant and continues to outperform other investment avenues, over both the immediate and long term. Standard Bank’s latest data shows Western Cape property leading the field with values 39% above their trough in 2008-09, with Gauteng not too far behind with price growth of 35.5% over the same period. FNB’s latest property barometer shows house prices in April improving to 5.5% nationally

According to the Pam Golding Residential Property Index, despite facing a range of economic and political headwinds, national house price inflation has eased only marginally – slowing from an average of 4.7% in 2016 to 4.35% during the year to date. Encouragingly, the major coastal metro housing markets of Cape Town and Durban continued to outperform the interior metro markets in early-2017, with growth at 13.4% and 6.7% respectively.

First-time home buyers appear to be sensing the wind in terms of future economic prospects and continue to comprise a very high proportion of mortgage bond applicants – 46% during the first four months of 2017. This trend is not really surprising given that house prices continue to rise, albeit at a slightly lower rate than last year, and expectations are of a possible rate cut later this year.

The fact is, as mortgage originator Ooba points out, home buyers continue to face affordability constraints in the current economic environment.  Applications with deposits continue to have a higher rate of approval than 100% bond applications, in which instance banks are currently extremely cautious.

Prior to the Cabinet reshuffle, FNB’s Agent Survey revealed that demand from first-time buyers had strengthened in both the final quarter of 2016 and first quarter of 2017 in line with tentative signs of economic recovery. However, this has weakened as a result of the dent to confidence from the reshuffle, the credit ratings downgrade, and general political uncertainty.

Reporting an approval rate of 72.8% for April 2017, Ooba observes that there is still strong competition among home lenders for new business. This is despite their being more cautious, with bank average decline rates up 2.8% year on year.

Rising prices and increasing costs are shaping the national residential property trends. Standard Bank reports that Gauteng continues to attract the biggest number of property transactions at 42% last year (2016), followed by the Western Cape with 25%. Reflecting this are also the demographic trends – Gauteng is where the youngsters go, attracted by greater job opportunities.

FNB’s property strategist John Loos compares the two cities thus: “Cape Town has become about lifestyle for the affluent…Gauteng is more a functional working region, a place where young professionals go to launch their careers.”

Meanwhile, both KwaZulu-Natal and the Eastern Cape tick along steadily. The median house price in KZN was up 6.2% year on year in April, just ahead of inflation while the top end of the housing market in this region is enjoying popularity with affluent buyers. And according to Lightstone, the Eastern Cape is experiencing house price inflation which has rebounded throughout 2016 and into early 2017.

Overall, there is an air of some uncertainty hanging over the residential market facing, as it does, economic and financial instability and political upheaval. Yet in spite of this, the market remains relatively calm, and showing above inflation price growth in many key areas, as demand overcomes supply.

For those who took the plunge – whether freestanding home or apartment – say for example three years ago, compound growth has been rewarding.

Dr Andrew Golding is the Chief Executive of the Pam Golding Property group

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