Property Prices have started to decline in many parts of the world with the USA leading the tendency and still sending out signs of continuing distress.
South African property prices, by contrast, have kept up remarkably well. Typically of a mature market the growth has also subsided but the expectation is that a growth of 14 to 15% for 2007 will still be reached.
That is way above the average in the world. Absa Bank SA expects the South African property growth to come down to 8% in 2008. However, they expect the average growth to be about 12.5% per year for the period 2007 up to 2011.
If that is the case, with only an 8% growth projected for 2008, it means that the period 2008 to 2011 will render an acceleration in property growth. To understand the rationale behind this projection, we will have to asses what happened in the world over the last few years.
Many parts of the world have experienced a rage in rising property prices over the last few years but all of that has started to subside quite severely. The main reason for the rising property prices was low inflation and therefore low interest rates all around the world.
The Chinese could basically be thanked for that as their work force worked tremendously hard on a very low income and thus they ensured that all of us had the benefit of the relatively cheap cost of borrowed money. You can thank the Chinese for your grand new house Mrs. Jones! And Mr. Jones, please spare a thought for the Chinese worker when you enjoy the acceleration of your new space age vehicle!
Every party thoroughly enjoyed, leads to over indulgence: Eating, drinking, jiving beyond one’s normal capacity. Inflated spells of joy cannot last. Life sees to it that everything deflates in time.
The various directors of finance in the partying countries had to watch the rebirth of inflation, and as it wiggled it's ugly head, they started to pound on that. Interest rates started to rise and the overly enthusiastic participants who indulged in property buying in a Dionesian manner, started to feel the throbbing headache when rising rates hammered raging greed into submission.
South Africans, or more precisely, buyers of South African property went through all the nuances of this whirlwind experience and are also now tasting the effect of increased interest rates and the accompanying realism relating to property prices.
But as stated above, it is expected that the South African property prices will surprise again with an acceleration in property prices.
Where will it come from and why so?
Expect the Fed to cut rates in the march up to the selection of a new USA president. They need to stimulate the USA economy and have already increased rates up to a point where the next move is expected to be down. Not yet, because inflation is still a huge concern. But, inflation must be very bad for a decrease in rates not to happen in due course.
With China still very vibrant in growth, India smiling in mischief over it’s own flexing of economic empowerment, the USA as the world’s leading economy will start the new upturn in economic expectations. Bar the worsening of political strife and a unstable oil production line, 2008 can be seen as the turning point in the ongoing cycle of things going down and then going up again.
South Africa’s Governor of the Reserve Bank, Mr. Tito Mboweni, will most likely start to lower rates sometime in 2008. The effect of that will not be felt immediately, but come 2009 we can expect the economy to spread the feel good factor widely. Property prices will then in such an environment start to increase in a stronger manner as the supply/demand factor will turn to favour demand.
That is the part expected on the normal ways of the economic cycle.
To this we can add the excitement of the Soccer World Cup in 2010. This great event will stimulate the economy even more as tourists and fans start to arrive in droves to attend the festivities - or war as some will surely approach all of this!
They will spend handsomely during the weeks of the Soccer World Cup and many business ventures will benefit from that.
There are still masses of South Africans who yearn for better housing and the stimulating effect of the World Cup will ensure that more and more of them will be getting and settling into middle class standards of comfort.
They will demand better quality houses and thus with the masses of households here implied, create a rise in prices over and above normal ways of the economic cycle.
And then we have the fact that many visitors will be exposed for the first time to the astonishing beauty of the South African landscape.
The beautiful beaches of the Cape and Garden Route, the striking mountains of KwaZulu-Natal, the immense spaces of the Karoo and the Free State, the Big Five in the Kruger National Park - that and so much more will ensure that quite a number of visitors will find good reason to buy property in South Africa!
Taking historical tendencies into account, people tend to buy property in a foreign country only after they have grown accustomed to local circumstances and have experienced first hand the splendour of a new country.
Tourists will come to know the enormous mineral wealth of South Africa and the importance that is implied with that. South Africa is for example embedded with about 80% of the world’s platinum resources and that being such a crucial substance in future it ensures increased interest.
Some soccer enthusiasts will become investors and out of that, demand for premises and housing will develop.
They will also find that because of a favourable exchange rate, great value can be bought compared to the price of real estate at home.
For South Africans as such, as experienced in Germany right through their hosting, a new sense of togetherness and pride will be coming forth. And that will have a tremendous effect on nation building. The benefits for the economy speaks for itself.
With the stage set for a great influx of people to the country and constant visibility in the media, the normal economic upswing will be enhanced with demanding property prices starting in 2009 and accelerating towards the Soccer World Cup.
Wim van der Walt
June 19, 2007
