While many areas of the world are literally struggling to make ends meet it seems as though South Africa is going through something of an uncontrollable growth phase with consumer spending out-of-control, the housing market on the way up and interest rates increased 6 times since June 2007 to the current level of 12%. As yet this aggressive interest rate strategy has not proven to be successful as the authorities seek to bring the rate of inflation down to between 3% and 6%. So what next?
According to South Africa’s largest mortgage lender, Absa bank, the outlook for the next 12 months for the South African property market is very subdued to say the least. There are a number of issues to consider which include:-
As with any developing economy, a double digit rate of inflation is bad news in the medium to longer term even though short-term increases in economic activity may initially be well received by the business market. However, there is no way that prices can increase at the current rate of 13% per annum without setting up the economy for a serious fall back. The government has indicated it’s preferred range is in the region of 3% to 6% which although higher than places such as UK is probably acceptable in developing markets such as South Africa.
Over the last 17 months we have seen six increases in South African interest rates which have now settled at the 12% level. While an increase in interest rates can often be a rather basic tool in the fight against economic growth, with inflation running at 13% there is very little else that the authorities can do. By increasing the cost of borrowing it is hoped that consumers will start to reduce their spending, businesses will start to consolidate and the out-of-control price rises seen of late will start to subside.
The South African economy is one of the most complicated in the world and is in effect a dual economy were the more developed areas of the country enjoy the wealth and prosperity which comes with economic growth whereas the poorer areas of the country seem to be stuck in something of a time warp and a slowly developing economy. Even though South Africa is classified as a middle income ranking economy it is generally referred to as a developing nation because of the quasi dual economic system.
There have been changes of late with regards to employment law, overseas investment, property ownership and a relaxation of historic political regulations although there is still much work to be done. The property market is also a reflection of the dual economy and while it is difficult to produce an average figure there is no doubt that property prices have been increasing over the last 12 months.
South Africa, like so many similar countries, is an area of the world which promises so much but fails to deliver to the whole of the country on a long-term basis. Even though the political situation in South Africa is very much calmer than many surrounding countries there is no doubt that work is still to be done even though great progress has been made over the last 20 years or so. There are still many laws and regulations which need to be amended and changed to bring many parts of the country into the 21st century and ensure equality is visible throughout the country. Even though the country itself has attracted massive overseas investment over the years there is potential to increase this yet further in due course, something which will help the economy and the property market.
As with the South African economy it can be argued that there is in effect a June property market with the higher end in cities such as Cape Town, Port Elizabeth Durban and Johannesburg with the rest of the country very mixed on a local property market basis. The last couple of years have seen double-digit growth in the middle to lower end of the property arena although the higher end of the market has performed slightly worse after a very buoyant period back in 2004.
There is an expectation that house price increases will fall to around about the 3% to 4% level for 2008 and 2009 which when you consider a rate of inflation in excess of 10% is actually a substantial real term fall in property values. Surprisingly for a country such as South Africa many experts see greater value in the higher end property market where prices have not performed as well of late and are starting to look better value for money.
The only real problem for the South African property market over the next couple is the fact that interest rates will need to remain at higher levels in order to reduce the risk from inflation which is slowly eating away at the underlying economy. Once the rate of inflation falls to around about the 6% level we should see interest rates starts to fall and the economy return to a more balanced position.
South Africa is a country which rarely receives the recognition it deserves in many ways for the multitude of changes over the last 20 years, even though there is still much to be done. The economy has performed well over all although as we suggested above there are many areas of the country totally out of sync with the more developed regions such as Johannesburg and Cape Town. The property market, along with economy, has begun to show signs of overheating which is why we’ve seen the rate of inflation increase and why the government has decided to increase interest rates.
Longer term there still appears to be much potential in the South African property market although the rate of inflation needs to fall substantially as actual property price rises are converted into substantial real term falls when inflation is taken into account. The next two years are forecast to be tricky for the South African property market although 2010, when South African holds the football World Cup, is a time when interest and visitors to the region should show significant increases.