Crime as a key risk to residential property performance

Although interest rates arguably remain the key driver of the property market deterioration, the spectre of crime may be playing an increasingly important negative role too, especially given the township unrest that has flared up around Gauteng in recent days. There are many negative forces in residential property at present, making quantification of the effect of any one factor difficult if not impossible. But in the former white suburbs of Gauteng, emigration talk is rife and crime very often features prominently in such conversations. In addition, in FNB’s Property Barometer surveys, the first signs of the much talked-about emigration surge may possibly be surfacing in the numbers, while a significant percentage of sellers sell in order to relocate for security reasons, underpinning the importance of crime in driving buying/selling behaviour.

We believe that rising interest rates are probably still “public enemy number one” in terms of exerting pressure on the residential property market. However, the gap is narrowing between the importance of interest rates and non-interest rate negative forces.

In FNB’s First Quarter Residential Property Barometer, released recently, estate agents surveyed were asked to indicate the factors influencing their (somewhat negative) expectations for residential property market in the near term.

In the survey, just keeping their nose ahead of the pack were interest rates as the main driver of near term expectations. However, significant is that the National Credit Act, in the previous quarter still in the number 2 spot behind interest rates, slipped back into number 3 position behind the category labelled “general economic downturn and negative sentiment”.

It is difficult to dissect this rather general category of factors, but it appears to relate to the growing number of non-interest rate related factors causing a deterioration in sentiment. Amongst these would feature the perceived heightened political and policy uncertainty following the ANC’s Polokwane conference, which leaves the ruling party seemingly at odds with its own government, while the Eskom debacle early in the year must have contributed. The negative effects of a global economic slowdown on the local economy must also have played a role, while the heightening Zimbabwe crisis and government’s poor handling of it has not gone unnoticed by many.

But possibly worse than all of the above is the spectre of crime. One can try to play its importance down or to focus on other factors, but especially in Gauteng, crime is arguably the greatest fear of the average suburbanite who is responsible for driving the performance of the residential property market. Emigration talk, and action, is rife in the suburbs, and my experience is that crime usually crops up fairly early in any such emigration conversation. Two quarters ago, in our Property Barometer, we started a survey question asking estate agents to provide estimates of the proportion of suburban sellers selling for each reason, and we provided them with set standard categories of reasons as outlined in the table below. Two categories of sellers whose percentages are not insignificant are those selling in order to relocate for security reasons, amounting to 12% of the total number of sellers, while those selling to emigrate also amounted to 12% of the total in the first quarter. In addition, while 2 quarter’s worth of figures should be interpreted with caution, we saw a rise in the emigration percentage from quarter 4 of 2007 (9%) to Quarter 1 2008 (12%). Noticeable was the quarter-to-quarter jump in the emigration percentage in “high net worth” areas from 13% to 18%.

In addition, there is anecdotal evidence of a rise in prominence of so-called “semi-gration, i.e. re-location to another region of South Africa, and the high crime of especially Gauteng, and to a lesser extent other major metros, is believed to be playing a role (although there are many other reasons for semi-gration, most notably normal career opportunities). The surveys of reasons for selling suggest that the emigration issue is a little more prominent in Gauteng compared to the major coastal urban regions. In quarter 1, 14% of sellers in Gauteng were selling to emigrate, compared to a lower 9% in the 3 major coastal regions of Cape Town, eThekwini and Mandela Bay (where the surveys predominantly take place). Moving for security reasons is also, as expected, a higher 14% in Gauteng compared to 10% in the coastal regions.

THE CRIME RISK IMPLICATIONS TO RESIDENTIAL PROPERTY PERFORMANCE ARE VAST

Stating the obvious, each household leaving the country due to crime means one less household in the market to support the demand growth of residential property. But crime also drives re-location of people within SA, driving relative performances of regional property markets as well as certain types of property.

  • Again stating the obvious, in high crime regions such as Gauteng, crime gives secure (or at least perceived as secure) cluster living the advantage over old fashioned stand alone suburban living. Boomed areas can and do often flourish under such circumstances.
  • The high rate of crime probably affects the higher end of the market more, as higher income/high net worth households are the best equipped to emigrate or to semi-grate and work remotely from their clients or primary offices.
  • The Gauteng residential property market is believed to be more at risk due to crime, being the high crime region, with demand growth possibly being hampered a little more by higher rates of emigration and semi-gration away from the region compared to the other major regions. The recent township unrest further fuels perceptions of an unsafe region, even for suburbanites who are as yet not directly affected.
  • Lower crime and good lifestyle regions such as the Southern Cape could be benefactors of high national crime rates due to their potential appeal as semi-gration destinations in years to come.

But the direct impact on residential property demand growth, due to people either re-locating within the country or emigrating, are only part of the story. Indirect impacts are also potentially significant.

  • Given that higher income/highly skilled people are the ones that drive economic growth and job creation in a modern economy (and are in many instances in short supply in SA), the fact that high crime drives a portion to foreign shores and curbs SA’s appeal as an immigration destination contains economic growth, job and income growth and thus residential property demand to some degree.
  • Crime also hinders the improvement of lifestyles in the major metros. Public transport is often perceived as unsafe due to crime, promoting congestion by private vehicles, while living in close proximity to open spaces is often seen as unsafe, risky and problematic rather than as a major lifestyle benefit. The reality is, high density cities with a lack of safe public open spaces and mass public transport will probably not be very appealing places to reside. Could such cities compete effectively for skills with other global cities? Or could they compete as effectively for skills as they have in the past with smaller urban centres in SA?
  • Crime may also contribute to something of an improvement in economic performance of certain smaller economic regions relative to the major economic regions. Long term economic growth by province is believed to have been stronger in the major 3 provinces, namely Gauteng, Western Cape and KZN. A smaller region such as the Southern Cape, for instance, is believed to have had rapid economic growth off a smaller base, and the combination of its lifestyle as well as the repelling force of crime in the major metros may boost the region’s ability to attract the skills set necessary to sustain high rates of economic growth, thereby boosting residential property demand in such a region in years to come.

IS THERE LIGHT AT THE END OF THE CRIME TUNNEL?

There is little denying that crime in South Africa is very high, and that it could be regarded as a crisis due to its often violent nature. But to make the assertion that the trend is a “one way traffic” one permanently trending higher is not necessarily correct. During the current decade, we have witnessed the official crime statistics showing broad declines in certain categories, notably murder, rape, car hijackings and car thefts per 100,000 people, although there has in many instances been some renewed rise in the past year or 2.

Housebreaking, however, appears to have risen steadily through the current decade, contributing strongly to a feeling of increased vulnerability even though many housebreakings are not of a violent nature. In addition, it is not a given that SA will be a high crime country forever. While I do NOT pretend to be a crime expert, I do believe that anything that goes up can come down, and that it possible that crime can work in long cycles like many other variables. 2007

On 12 February 2007, in an article titled “Crime, where facts, politics and emotions clash”, well-know political analyst JP Landman discussed the possible link between demographics and crime, referring to “a school of thought that believes that most violent crime is committed by males under the age of 35”. He cited a 2005 Financial Times article which makes the statement that “If the age group 15-29 is more than 30% of the total population, violence follows (Caldwell, Fin. Times, 5 January 2007). There are 67 countries in the world with such “youth bulges” now, and 60 of them are undergoing some kind of serious killing, civil war, insurgency and so on”.

Should this demographic link to crime be real, Actuarial Society estimates that the 15-29 year old age cohort increased in size as a percentage of total population through the 1990s may explain some of the rising crime trend during that period. However, some mild encouragement may be provided by the Society’s belief that this percentage began to stabilise during the current decade, and is projected to decline during the decades to follow.

Perhaps the stabilisation in the above-mentioned demographic ratio explains some of the stabilising in some crime categories a few years ago (albeit at very high rates), and perhaps a faster growing economy with improved job creation for the 15-29 year-old age category helped too. On the other hand, how will the collapse of Zimbabwe, and the apparent flood of illegal immigrants taking place reverse any gains made in the fight against crime? It is suggested that the recent violence in Gauteng’s townships may have a xenophobic flavour, with foreigners periodically accused not only of taking locals’ jobs but in some cases of driving crime. Whatever the reasons and however justified, the unrest action in itself, if not brought under control quickly will probably further serve to persuade many suburbanites of the lack of safety in the region, thereby convincing them that it is time to look for “greener” pastures.

So the situation is complex and far from resolved. But sadly, while crime in recent years has not all been on an upward trend, and while there may even be some encouraging signs in the form of demographic trends possibly related to crime, for many suburban people all that matters is that crime is far to high, looks likely to remain so at least for the foreseeable future, and they have had enough. This poses a major risk to the future performance of residential property both directly, through driving emigrants out of the market, as well as indirectly, through restricting skilled labour supply and therefore economic growth and job creation.

IN SUMMARY

Although it is to early to draw hard and fast conclusions about the extent of emigration, anecdotal evidence is that there is a surge in the emigration rates, and indeed FNB’s Property Barometer suggests a jump in emigration-related selling of property, especially on the highpriced end, from quarter 4 2007 to quarter 1 2008. Crime features prominently in much of the emigration talk.

In FNB’s Property Barometer for the first quarter, the deterioration in sentiment due to non-interest rate factors overtook the National Credit Act (previously a close second in importance behind interest rates) in importance in driving estate agents’ somewhat bearish view of the near-term performance of property. I believe that crime probably plays a key (though not solitary) role in this sentiment deterioration. Crime, although having been very high for many years, appears to have become more of a concern lately, helped on by some high profile violent acts, and as such it appears to have become more of a risk factor for the residential property market. It is arguably more of a risk to the high end former white suburban residential market. It is also probably more of a risk to Gauteng’s market than elsewhere, and could ironically boost the likes of the Garden Route’s property markets through supporting the “semi-gration” drive out of major metros.

Fortunately, like many other things crime appears to run in cycles, but often very long cycles. I believe that it is possible that the high crime situation can be improved in years to come, and that at least when the host of other negative forces subside, the focus on crime may subside somewhat too. At present, however, the weakening phase in the residential property cycle is being influenced by far more than just interest rates, despite the best efforts of the SARB.

Article by: John Loos - www.fnb.co.za