‘Semigration’ drives up Cape property prices but rest of SA market in doldrums

With the possible exception of Cape Town, house prices are expected to grow at a sub-inflation rate of 2-3% per annum over the next five years or longer, which in real terms, after taking inflation into account, means a decline in house prices. 

This is the prognosis of property economist and valuer Erwin Rode, CEO of Rode & Associates, who says if you can buy your home with cash, that is preferable to taking out an 80-90% bond and treating the purchase as an investment, as with higher interest rates expected of 1-2%, homeowners will be negatively gearing immediately. Rather rent than leverage, he says. “If you are an optimist, then my argument doesn’t hold.

“The junk status rating is not the cause of our misery to come, it’s been coming for three to four years now with the gradual deceleration in the economy caused not only by the price of our commodity exports but also by the mismanagement of our economy. These two factors have slowed the economy, especially in the last two years. Junk status now is a just a symptom of the malaise.

“What can we do about it? It’s not a cyclical thing. We have entered a period of suboptimal growth to last for many years because it is a structural problem that cannot be solved overnight, nor is it going to be solved by getting rid of our president. It’s not one individual but a structural problem.”

Rode says we are currently experiencing much lower economic growth than the 3% p.a. in the post- WWII years. “We’re going to see a maximum of 2-2,5% per annum growth for the next decade. When the economy slows, the property market is going to suffer too, by which I mean the non-residential property market as well, retail especially. Consumers are under pressure; unemployment is not going to come down. Shopping centres won’t be as attractive an investment  in the next few years as they have been in the past 40 years.”

Read also: Cape Town house prices: Can they keep soaring? Expert analysis

Houses will also be affected by affordability, he adds, with the above-mentioned rise of 1-2% in interest rates expected, and disposable incomes also under pressure.

“As for the affordable housing segment, it is dependent on the number of government employees, but government is (or was) trying to rein in the number of employees and their salaries. This will also have an impact.” 

He points to Durban where house prices have declined by 2% according to the latest FNB index. And no rise in Port Elizabeth. “Cape Town is the exception, experiencing amazing growth, owing to ‘semigration’, but it’s difficult to forecast what will happen to Cape Town property prices. For the rest of the country, we’re going to see sub-inflation growth in house prices.”

“So house prices will decline in the medium term in real terms. The worst historic decline we’ve seen in house prices was in the deep recessions in the Seventies and the Eighties when the cumulative declines amounted to no more than 10%. If things go really awry, such as in the worst case scenario of government starting to nationalise, house prices will decline by much more. Should the rand fall drastically, in the worst case scenario, inflation will go through the roof. But this is not a likely scenario.”

Read also: African billionaires eye prime Gauteng properties: Look what $9m gets you in Golden City!

“People have become fed up. The underlying problem is the expectations that have been created that cannot be met because of the age profile of our population and their continuing ill- preparedness for the modern economy, not to mention the lack of job-creating entrepreneurs. South Africa is like a riverboat on the Congo River that is seriously underpowered, and with more and more people jumping on board at every stop.

“The first reaction to the disillusionment was when President Mbeki was fired. Now President Zuma is not going to be the answer either, and the number of populist pronouncements, like nationalisation, is growing. Assurances to the contrary by the new minister of finance (he with his communist adviser) seem hollow, as policy can change overnight. When President Robert Mugabe of Zimbabwe was facing a similar wave of disillusionment, he opted for radical transformation in the vain hope of improving matters.” 

At the coal face, Lew Geffen, chairman of Sotheby’s Lew Geffen Real Estate, reports that with the exception of the Western Cape, from Plettenberg Bay to Cape Town right through to Paternoster, where sales are booming, in Gauteng and other regions, sellers are more amenable to offers that they previously rejected. 

“Zuma’s Rubicon has sent shockwaves through society and people are reconsidering just about everything. Where the Cape will suffer is from people upcountry having to sell their own homes for less and pay double in Cape Town.

“I think we are in a full recession. I don’t see much positivity for property prices, especially in Gauteng. We’ll see downward pressure on property prices and a lot of stock available. The converse is it’s good for buyers, but only if they can afford higher interest rates. The situation could turn. This is a recession driven by sentiment, rather than fundamentals. If the political landscape had to change radically, it would lessen the blow to the property market. We have one big problem in South Africa which will remain nameless. At least we can regain a bit of hope if that problem were resolved, because it’s at an all-time low. Hope can spur a market on. If the situation is hopeless, it’s a different story.”

Geffen cites a case in point. “We had a property for sale priced at R16m. We got an offer for R13m before the firing of Pravin Gordhan, which was rejected outright. A month later the seller accepted R10m. In real terms that’s a loss of 30%. I think it’s only the beginning. We’re going to see ripple effects  of that. You know that South African song: ‘Give me hope, Joanna’. We need a little bit of hope.”    

Absa Home Loans property analyst Jacques du Toit said “presently has no specific comment to make except that the economy, consumers and eventually the property market may experience protracted difficult times in view of current trends and prospects”.

Read also: Maynard on Migration: WC has the looks but Gauteng’s attraction is jobs.

FNB property and household sector strategist John Loos “believes that South Africa is firmly in its Economic Super-Cycle ‘Stagnation Phase’. This is because we have largely used up the easy stimulus ammunition that we possessed in the 1990s. By this ‘ammunition’ I refer to, firstly, the political settlement of 1994, which unleashed new trade and business opportunities as the boycotts/sanctions and economic isolation from the world ended. Next, we had extremely high interest rates and relatively low levels of consumer debt. ‘Normalising’ interest rates from the late Nineties onward unleashed a massive consumer and housing boom, driving economic growth still higher. But the consumer is now more highly indebted and can’t respond in such dramatic fashion to rate cutting anymore. Finally, when we got into trouble growth-wise from 2008 onwards, government was able to run a far wider fiscal deficit for some time, and ramp up its debt levels in order to support the economy to an extent. Now, its own debt levels, and the rising trend, have become a concern for investors, and cannot be continued indefinitely.

“And so, we sit with a stagnant growth economy, little in the way of easy stimulus measures available, and major structural constraints (the most notable one being a highly unequal skills distribution in a modernising economy) that are a drag on growth. The last Super-Cycle  stagnation period of the Eighties/early Nineties contributed greatly to a volatile period of heightened social tensions and major political change, and this one also looks to be bringing greater volatility and ultimately some form of major change.  

“Property is not divorced from the economy, and thus I believe that it, too, has entered its ‘Super-Cycle Stagnation Phase’ (the Western Cape excluded for the time being), which could prove to be a lengthy period of broad real price ‘correction’. We have one good thing going for us, and that is the gradualist approach of the SARB to interest rate moves these days. This is very different to its Eighties/Nineties responses to major economic shocks, when it would hike or cut rates at a rapid rate (just think of the 1998 rate hiking of 7.25 percentage points in less than two months in response to a rand shock). The very slow moving SARB of today greatly assists in smoothing out the economic  and thus hopefully the property cycle. First prize in the super-cycle correction phase would be a smooth correction, one where nominal house price growth remains by and large in low single digit positive territory, but generally below general inflation (as measured by the likes of the CPI), thus causing a gradual decline in ‘real’ house levels over a long period of time. I believe that such a relatively smooth correction can be achieved, given the modern day SARB approach.

“For 2017, I have pencilled in a 3% average house price growth, which would be below expected CPI inflation and would thus represent such a real house price decline for the year.”