SA property prices have “slow puncture”

After allowing for inflation South African home prices have entered a long-term negative trend.  This is good news for home buyers, but bad news for home sellers.

FNB property economist John Loos says the “slow puncture” of real property prices in South Africa has begun. Loos believes South Africa has entered a long-term cycle of property prices failing to grow in line with inflation.

He says global low interest rates since 2008 have kept property prices artificially high. “The abnormal stimulus that kept the party going from 2008 is over,” he said. “The economy is stagnating and price levels need to reflect that better.”

He said that while the South African house market still remained solid, growth in the market appeared to be gradually running out of steam. This means that the time for a more significant “downward correction” in real house prices may be nearing, However this correction  is more likely to be reflected as a slowdown in growth – rather than a crash in property prices

“While house values may be rising in nominal terms, in real terms when adjusted for inflation, house prices are declining gradually. This will result in a gradual move to lower real home values.”

Time frames for real housing market corrections can be particularly long. Loos points out that the previous big downward correction of the 1980s/90s took place over almost 15 years, from 1984 to 1998, creating a very low real house price base off which the country could launch one of its biggest house price growth booms from 1999 to 2007.

The twin factors of inflation dropping from the late-1980s onward, combined with a low interest policy from 1998, created a housing boom after 1998. Many first-time buyers sped up their home purchase out of panic thinking that if they did not, they would no longer be able to afford property in future. The result was a real house price peak at the end of 2007 that eclipsed anything in the country’s recorded history, said Loos.

Downward correction not completed

The bad news for property owners is that Loos believes that the “downward correction” process that started at the end of 2007 is not nearly completed.

He says that prices have not “fully corrected” since the end of the boom in 2007 and the short, sharp 2008/9 recession, said Loos. He said the correction in house prices was cut short by an abnormal fiscal and monetary stimulus across much of the world. In South Africa government increased its debt ratios and the Reserve Bank cut interest rates to multi-decade lows in order to “keep the economic party going”.

Said Loos: “This delayed the full correction in house prices.” But now, Loos said, we have reached the point where the stimulus is running out.
The SA government has begun to raise taxes more aggressively to narrow the deficit and curb its debt growth, while the Reserve Bank has announced that it is time to start “normalising” interest rates upwards soon.

The world’s biggest economy, the US, looks set to do the same fairly soon. And on top of the stimulus running out, Loos said the South African economy was slowing and disruptive social tensions are rising. This means that South African economic growth in the short term will be a pedestrian 1% – 2% growth at best, instead of a 5% plus economy..

Loos believes that real house prices have to reflect economic weakness and the absence of further fiscal and monetary stimulus. This means lower prices in real terms from the currently high levels.

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