A view on the residential property market
Amid uncertainty lies opportunity. That much has always been true. The ability to interpret the market and understand the good opportunities from the bad is the key to making the most of troubled times.
Where there is turmoil in a marketplace, when there is pessimism in the talk of the town, or when there is a bad gut feel about the safety of ones finances, people tend to make decisions based more on emotion, and less on the merits of their investments themselves. This can often lead to the shedding of assets at lower values in an effort to “stop the haemorrhage” so to speak. It is in times like these that patience, coupled with smart acquisitions can see an investor coming out of a difficult economic situation ahead of the rest.
South Africa is without doubt in a state of turmoil, ridden with pessimistic sentiment about the country’s economy, driven mostly by the latest rating agency downgrades and political uncertainties. The prevailing negative consequences of such factors is causing uncertainty for investors, questioning the long term effects this will have on their portfolios. With that in mind, what can we expect from the residential property market over the next year?
Prior to the downgrades, all signs pointed towards 2 interest rate decreases, with some industry leaders predicting as much as 3 decreases during the year. This of course was welcome news to property owners currently servicing bonds, as this would have had a meaningful effect on their repayment amounts, freeing up some extra cash each month.
Now with the cost of borrowing money increasing for the government, and ultimately for the banks, interest rates are more likely to increase, ultimately having a negative effect on the property market, making it more expensive to own a property that is bonded. This does however have a positive spin for those investors looking a buy properties in cash (in their individual capacity, or as part of a shared portfolio) as fewer people will be in a situation to do so, creating a stronger buying position that will lead to better deals.
Availability of credit
Because of the increased cost of borrowing money, banks will ultimately have to hold on to more cash than before. This has a direct effect on the availability of credit to the consumer. This will translate into fewer bonds being approved by the banks making it harder for prospective buyers to secure finance for their property investment. First time property buyers will be the hardest hit by the scarcity of available credit, causing a delay in their investment timeline, potentially harming their ability to take advantage of the current low property prices.
2016 saw a steady decline in property prices, with some signs of slight stabilising toward the end of the year. It is expected that property prices will continue to decrease over the coming year, creating a strong buyers’ market, meaning that those in the position to invest in property will benefit from lower prices, leading to long term capital appreciation.
The growing middle class
South Africa has a middle class that continues to grow despite high unemployment rates and slow economic growth. With more and more people with increased affordability and the need to relocate to more popular areas around economic hubs, rental markets can expect to benefit from an increase in demand for well positioned properties.
This coupled with the difficulties facing first time property buyers to secure the finances required to purchase a property, buy-to-let property investors are in a good position for growth over the coming years.
Where the opportunity lies
Despite 2016 being a tough year for the country’s economy, with some signs of the property market losing ground, Dr Andrew Golding, CEO Pam Golding Property Group has been quoted as framing the country’s property market as “extraordinarily resilient”.
The residential property market in South Africa has remained a solid performer through difficult times, proving its resilience as a solid asset class. While the country is on the cusp of some uncertainty, with many factors at play that can influence the property market performance, the environment seems to paint a positive picture for investors who are in a position to own unbonded, buy-to-let property.
An investor entering the residential property investment market during a market downturn will find themselves in a position to enjoy strong rental demand in the market place. Further to this, having the buying power to secure undervalued assets at low prices allows the investor to enjoy solid capital appreciation over time.