The economy will dictate house price growth
According to FNB property strategist, John Loos, a stronger economy normally means a stronger property market. Loos believes South African residential property will grow at a nominal rate of 8% in 2010, ending two years of negative real returns. The gist of Loos’ comment is that property depends on the economy for growth. He was quoted in a recent Sapa press release extensively used by local hard copy and web-based financial news services. You cannot expect significant performances from property when the economy is in recession. Likewise you cannot expect 15% plus growth from the asset class when GDP growth is just creeping into the black!
The FNB House Price Index, published on 11 January 2010, says house prices entered 2010 on a rising trend. House prices as measured by the index contracted 3.9% in 2009. This was worse than the 6.9% house price growth recorded in 2008 and way off the impressive 29.5% average house price inflation recorded in 2004, the best year in the decade. As we enter the New Year, FNB’s assessment of the domestic residential property market is fairly upbeat. Loos notes: “December was the second month of year-on-year increase in house prices after almost a year of decline. The trend bodes well for a better 2010, after the market hit rock bottom in the first half of 2009 and thereafter began to show improvement.” Although not much to get excited about, the trend points to a better 2010 for stakeholders in the residential property market…”
Unfortunately the residential property market is still caught between the positive impact of a five percent decline in interest rates and the ongoing debt crisis faced by local consumers. “There are still some key constraining factors on the market,” said Loos. “For one, the domestic household debt-to-disposable income ratio remains high, restricting the rate at which the household sector can grow its new borrowing for the time being.” In other words there will be no fireworks from this asset class until consumers get to grips with debt!
World Cup property boost – or damp squib
Market analysts are divided on the economic benefits that will stem from hosting the 2010 FIFA World Cup ™. The travel and tourism sector should record bumper sales over the traditionally slow June/July period, but the rest of the economy could grind to a crunching halt. If we strip out the long-term impact of event-related infrastructure improvements then South Africa will probably only benefit by a fraction of a percentage in GDP growth through 2010.
FNB agrees. They say the World Cup is “fantastic for South Africa and its economy in the longer term!” Loos believes the event will provide positive momentum to the property market, largely thanks to positive marketing spin. “With regard to the “direct” impact on property, in terms of football visitors directly boosting property’s performance by either buying or renting it during and around World Cup time, I believe the impact is set to be limited,” said Loos. The excessive rentals commanded by certain property owners through the event will return to ‘normal’ as soon as the international tournament moves on.
Property is still a consistent long-term performer
Property remains one of the best performing asset classes and owning your primary property still makes sense. Residential property has been in growth mode since 1997. According to economist Mike Schussler, the cumulative return on property since then is in the region of 450%. FNB’s house price records a cumulative increase of 195.4% since the index was launched in July 2000. The average house value for December was measured at R772974.
Editor’s thoughts: Real returns from residential property markets won’t impress too many investors. To make matters worse, recent reports suggest most residential rentals (flats and houses) are under pressure too. Would you consider purchasing a buy-to-let property against the current economic backdrop? Add your comments below, or send them to [email protected]
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