Bracing for a global property shock

Is South Africa immune to international property crisis? What the experts say…

A few months ago, few in South Africa had heard of the United States' sub-prime market. Now it's entered the national lexicon as an increasing number of news reports point to trouble for US property owners.

In the United Kingdom, meanwhile, concern is growing that residential property market there is so hot, it's set for meltdown., a popular British personal finance website, recently noted that UK house prices have risen uninterrupted every year since 1996.

Quoting the biggest home loan provider in Britain, Halifax, the site pointed out that house prices have been rising strongly in almost all developed nations between 2001 and 2006.

"With house price growth weakening in Spain, France and Ireland, and falling across the US, what's propping up UK house prices? Those with vested interests in property claim that historically low interest rates have created a ‘new paradigm' for UK housing," says the site.

It questions why prices haven't started to stall as rates have climbed and borrowing has become more expensive in Britain. One Fool commentator suggests that UK property owners should brace for a "crash".

This scenario may sound all-too-familiar to many South Africans, who are also asking whether our real estate market is heading into crash territory. After all, we have also enjoyed a property boom along with lower interest rates this decade.

And lately, rates have been rising and it has become much more expensive to borrow money from banks.

However, the general consensus seems to be that while a crash is never impossible, it is unlikely. This is because many area-specific or local factors affect property.

Property economist Francois Viruly, of Viruly Consulting and professor of property at the University of the Witwatersrand, says generally "we are seeing property markets that are increasingly synchronised across the world".

This is, he says, is possibly because interest rates are "seeing some level of synchronisation".

As this happens, "we have a property market that is increasingly sensitive to interest rates".

Nevertheless, the domestic "story" of the past few years has been of a residential property market driven by the rising middle class. Along with declining interest rates, this middle class has been stocking up on property.

Rather than a crash, Viruly sees buyers moving downwards in favour of more affordable housing.

As he notes, the Lightstone property data suggests the property market at the lower-end, of R200 000 a year, is showing price rises in the region of 40% a year.

Investment Solutions' economist Chris Hart says some people forget that, as with the stock market, South Africa is in a primary bull market when it comes to property. Hart points out that property is "not a nice to have - it's an essential ingredient".

"There's still value. I don't think conditions are right for a crash," says Hart, though he adds that "anything is possible" in this asset class.

Bear in mind too, says Hart, the interest rate cycle is peaking. The best stage from a buyer's perspective could be from now into the first quarter of next year.

Christo Luüs of Ecoquant also doesn't believe South Africa's property market is in line for a major correction.

Property price rises in recent years are mostly associated with an increase in income levels, a structural decline in inflation and lower interest rates, he says.

Demand for housing in South Africa is an important factor. "The US and the UK don't have a natural increase in the population to the extent we have here," says this economist.

However, Luüs cautions that a major slump in South Africa's economy could lead to a major battering for the property market.

"As things stand, I wouldn't be too concerned about a crash. I think we can ride out a storm," he says.

Article by: Jackie Cameron -