Final Bubble or Bust

I've examined a number of viewpoints in relation to the possible SA property bubble.

To recap:

  • Historically the Chinese Property bubble of 1993 had a few lessons for us. Viz. don't overestimate the emerging middle class and be wary of government intervention that could suddenly cause a collapse - as the introduction of capital gains tax aggravated the collapse in China in 1993.
  • Dr Adrian Saville examined the factors necessary for a bubble situation in his article. Linking GDP to growth in the housing market, he identified 5 'deadly sins' that can contribute to a bubble situation, viz. ample liquidity, increasing use of leverage, increased turnover, democratisation of the market and new supply.
  • Meg Wilson's article covered why she thought the SA market wasn't in bubble territory. Some of the factors ascribed to the sustained property boom are:
    • Black economic empowerment that brought thousands of previously "unhoused" people into the formal property market;
    • Lower household debt ratios as a result of more conservative borrowing in reaction to the high interest rates of the late '90s;
    • Lower interest rates, with prime declining to 11 percent from its 1998 peak of 25,5 percent;
    • Inflation-beating wage and salary increases that resulted in household disposable incomes growing faster than the economy until late last year;
    • Greater confidence in the political and social future of the country, as well as the economy.
  • Trevor Manuel's contribution to the current economic and property boom.

This week I'd like to touch on three of the major factors that have been driving the SA boom and possibly mitigates the bubble theory - at least in some instances. Some of these are covered in the abovementioned articles and those that have been discussed at length I will avoid now and concentrate on three of the remaining factors.

The emerging middle class.
As Meg Wilson mentioned in her article, the new era of democracy has allowed thousands and possibly millions of people into the formal housing market. It is the emergence of this 'new' middle class (and upper class too) that has helped tip the balance of supply and demand to that of demand over the last 3 to 4 years. A well known estate agency previously numbered only around 3% of their buyers as coming from the previously disadvantaged sector three years ago, whereas this number has escalated to over 30% in 2004.

Township property boom
The second is the beginning of a housing boom in the affordable housing market and previously designated townships. The townships tell their own tales of the property boom. An agent working in Soweto mentioned that she would receive in excess of 200 enquiries on any property under R250 000 that they listed. Diepkloof in Soweto has seen an unprecedented boom. Although at the lower end of the market this sustained boom has a ripple effect all the way up the pricing ladder.

Returning Expats
The third factor is the number returning expats. A few years ago it was almost unheard of for people and families that had left South Africa to return. The aftershocks of 911 and global recession has fuelled a feeling of optimism in the future of South Africa as a safe (relatively speaking), economically growing and viable environment to reside in. Many of those that had left feel the pull of their homeland and some have started returning. High profile celebrities that have returned have helped make this an acceptable option. Francious Pienaar and Michelle Garforth are listed in their numbers. Some stats say that as many as 1.7 million South Africans are in Britain alone and a sizeable portion have expressed an interest in returning to South Africa, either on a holiday basis or permanently resettling in SA and those returning are looking to invest in the SA property market. These numbers start affecting the middle to luxury classes of homes. Here's an interesting article on returning expats.

Conclusion
Putting these factors together we can see three of the socio-economic factors contributing to the current property boom from the lowest price homes through the average middle class homes and into the luxury market. How sustainable or to what extent they will continue to affect the property market is open to debate and it is your answers to these questions that will lead you to your own conclusion as to whether the housing market is in a boom or bubble phase.

Article by : Dave Welmans - (www.thepropertygame.co.za)