Current downturn not much worse than pervious cyclical downswings

Residential property should be a long term investment and those who go into it for short term gains are ignoring its fundamental cyclic nature, says Tony Clarke, MD of Rawson Properties.

“Those who are complaining loudest about the recent downturn have almost always bought in the last three years,” said Clarke. “In many cases they expected values to continue to rise indefinitely and were banking on a short term profit gain. These attitudes are unwise and have always been shunned by the more mature investors.”

Investors who have been around some time, said Clarke, know that value crashes are invariably followed in due course by rises in which the previous values are exceeded.

“The mature generation of property investors,” said Clarke, “have lived through the 1976 Soweto crashes and at least three serious downturns, only to see the market revive each time.

“I challenge anyone who has owned property for 15, 20 years or more to show that it has not been a highly satisfactory investment. Indeed for the man-in-the-street his home is probably the only satisfactory investment that he will ever make.”

One of his staff, said Clarke, had bought a home and its adjacent plot in Hout Bay some 35 years ago for a total outlay of just over R20,000. Today the value of that property (with a few improvements such as a small swimming bath) is over R2 million, reflecting an annual increase of 14,7%.

“This,” said Clarke, “is by no means an isolated instance. Recently our Chairman, Bill Rawson, drew my attention to a 1986 advertising supplement in which we were publicising homes in Rondebosch at ± R80,000 and in Tokai and Claremont at R70,000 to R100,000. The annual escalation on these has been even better than that of the Hout Bay home quoted.”

Is the current downturn far worse than those of previous eras?

“Not in my view, said Clarke. “It is true that property values could still fall further (although I do not expect this myself), but I challenge any of today’s Doomsday prophets to come back to me in ten or 15 years’ time and report unsatisfactory value increases. If this does happen it will be the first time in South Africa’s history.”

The South African economy and South African property, said Clarke, are resilient enough to withstand the current threats to our constitution, the worrying corruption at high levels and the huge discontent of the unemployed.

“All of these are serious issues, but is there any evidence to indicate that we are not capable of handling political and economic slumps and inefficiencies as we have done in the past?”

The current property downturn in South Africa, in Clarke’s view, has three main causes:

  • The spiralling costs of resources which pushed up inflation and which, in turn, necessitated high interest rates;
  • The National Credit Act which overnight made thousands of would-be home buyers no longer credit-worthy; and
  • The banks’ over-reaction to the global crisis and their consequent clamp down on mortgage loans - to the point where 60% of applications are rejected (with a 90% turndown in some of the poorest areas) and, equally problematical, successful applicants often having to find 25% or 30% of the total cost as a deposit.

“The banks’ stance,” said Clarke, “is, in his view, irrational and irresponsible.”

“It seems to indicate panic. This is particularly regrettable in view of the fact that a similar irresponsibility on their part, i.e. a willingness to encourage excessive borrowing at all levels, but especially in the home mortgage market where loans of up to 100% and 108% were not uncommon, has been a root cause of today’s problems.”

All of the negative factors mentioned, said Clarke, will almost certainly be resolved in the next one to two years.

“It is, therefore, totally logical, as our Chairman, Bill Rawson, has said (and been widely criticised for saying), to advise people to buy property now at close to the bottom of the downturn. Those who refuse to accept this advice will once again find themselves buying on an upswing and missing out on what are really excellent opportunities.”

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