Expect further rate cut in buyers' market, as property resilience shows in turbulent times

In our post-Zuma economy, South Africa looked set to remain in a uniquely precarious position for some time, compounded by a contentious wage bill cut intended to curb public sector expenditure; load-shedding - which has effectively become another form of 'value-added tax' on consumers, and increasing debt burden. With the new threat to the economy that COVID-19 poses, our Finance Minister’s thoughtful, conservative Budget looks set to be obliterated, seemingly overnight. 

The ongoing emerging markets selloff brought on by the failure in confidence on the back of the COVID-19 fallout leaves SA with nowhere to hide - but conditions are working to bring about a rare silver lining.

Jacques van Embden, Managing Director at Blok property development firm says, “We are living in fearful times, and consumers are understandably uncertain over what the future may hold. However, if there is one thing history has taught us, it is that the economy will eventually recover; and that property is one such asset class that shows stability over the long term.”

Code Here

While the famous Warren Buffet quote related to market investment timing, ‘“Be fearful when others are greedy, and be greedy only when others are fearful” may seem somewhat exploitative given the current context, the experience of past economic crisis does reveal this rare silver lining. Current SA conditions favour those looking to enter the property market even more - and not just the top 1%.  

“Although times are undoubtedly very tough with the economic life of the country crippled by the Coronavirus outbreak, we are now entering a phase in which it will be easier to finance the purchase of a home, particularly if you are a First Time Home Buyer or buying in the lower price categories,” says Rowan Alexander, Director of Alexander Swart Property.

Bounce-back-ability

In a recent article, a well-known bond company agreed that property was far less volatile than the stock market, maintaining a high tangible asset value. “People will still need accommodation, which offers a measure of security in terms of a property investment holding ground in times of turmoil.”

“What’s more, the property is an asset class with supreme resilience and a unique ability to ‘bounce back’ as market conditions improve.”

This is not to say that current conditions will have no impact.

Employment levels - currently sitting at a stark 29% in South Africa - and predicted to rise with the current pandemic - are among a host of other factors heavily influenced by the macro-environment, which have a domino effect on buyer confidence. 

Yet looking to US shores, CNBC recently reported that property continues to offer investors a ‘safe haven’ in volatile climates as the risk-reward ratios remain reassuringly linear, while an article published in the Global Property Guide analysing the 2007 economic crisis, reiterated that residential property was generally far more stable than non-residential real estate, regardless of country. 

An unprecedented buyer’s market

South Africa finds itself in an unprecedented buyer’s market, within the current supply-demand context. This as massive fiscal pressure puts the onus on the Reserve Bank to assist South Africans.

The recent slashing of the repo rate by 100 basis points - from 6.25% to 5.25% - subsequently reduced the mortgage rate to 8.75%  - and with the urgent need to stimulate a stalled economy, the market is extremely well-primed for even further rate cuts.

PwC economists Lullu Krugel and Christie Viljoen previously suggested another rate cut could be seen as early as May.  

If a further 0.5% rate was put into effect before the end of 2020, the banks’ prime rate could drop as low as 8,25%.  

Furthermore, many home mortgage applicants are already achieving loans at 1% below the prime rate and "will continue to do so", says Alexander.

“The government, although unable to offer the large-scale wage, unemployment- and business subsidies has declared its intention to ease the financial pressure caused by the recession and the impact of COVID-19, as much as it can.

These lower bank interest rates are significant and should be made use of.

Plot the next 12 months carefully

Alexander highlights how with an R1,5 million bond, the borrower could be paying about R1, 500 less per month by the end of 2020, than they were paying earlier in the year.

He cautions that the "difficulties of isolating individuals living in high-density townships and informal settlements and getting them to apply for virus testing, pose huge challenges for SA, as the Coronavirus Covid19 infection escalate.

“We are, therefore, possibly looking at a scenario where we should not expect a turn around to become evident in under twelve months.

"But these conditions make it much easier to secure a loan and to buy a home or an investment property at a time when others are holding back or unable to afford any purchases other than those essential for survival.

“As in previous hard times, those who move in now will be very grateful in 18 months that they did so.”

Don’t overextend yourself

And yet investors would be wise to heed the words of Ray Dalio, founder of the Bridgewater Associates hedge fund and one of the world’s most successful investors, “Consumption always grows faster than income”; meaning that investors should avoid overextending themselves - even more, pertinent in turbulent times. 

Last year showed that consumers did not understand that the local economy was in a crisis even before Corona reached our shores, as seen by the shopping fever on Black Friday, which resulted in a collective +R6 billion in debit and credit card transactions.

“However, there is a significant difference between ‘good debt’ and ‘bad debt’, and the property is widely considered to be ‘good debt’ given the lower interest rates and the fact that it has the potential to generate long-term income, explains van Embden.

“Consider investing in units that show sustained ROI, particularly those located in urban areas.” This advice appears sound, given that by 2030, the Government’s development plan acknowledges that 70% of South Africa’s population will reside in urban areas.