Is SA property going the same way as US’s?

The bursting of the property bubble in the US need not be followed by a similar collapse in SA says Michael Power, equity strategist at Investec Asset Management.

Speaking on Moneyweb Radio, Power said the danger of a US property meltdown lies in the extent to which our economy will be exposed.

He said if the bubble did burst, the knock-on effect would take time to play out across the world and it would ultimately affect South African through commodity prices.

“Commodity prices won’t hold up as much if US consumers cut back on their consumption,” he explained.

This will slow the rate of growth in China, negatively affecting their demand for our commodities.

American house prices have shot up in relative terms over the last few years and this is “an extraordinary perfect storm", said Power.

He explained that loose monetary policy in the US had generated consumer wealth, which had fuelled demand for property. The property market kept up with this demand by building 2m to 3m new houses each year and the combination was dangerous.

A bubble has been created on which whole world, to some extent, is dependent on, he said. “We are all drunk on American consumerism.”

Rocketing house values enabled Americans to draw more and more money out of their homes to fund their expenditure and Power reckoned the Chinese have been the beneficiaries of this spending.

“The current account deficit of the United States has ballooned in line with the increase in spending, and it’s no coincidence that about $600bn has been taken out in home equity withdrawals and the current account deficit being just a little more than that.”

But there are worries that the bubble will burst.

Monetary policy is being tightened around the world, not just in the United States but also in Europe and Japan. Emerging markets are being regarded as higher-risk assets In the United States 25% of all houses are being bought by investors or by people looking for a second home. People are probably just starting to get a little scared at that sort of statistic, said Power.

Article by: Gaylyn Wingate-Pearse - www.moneyweb.co.za