Recent property media has been abuzz with news of the real estate down turn occurring in the United States. With all the media sources available today you can’t possibly avoid hearing about the doom and gloom of the US Property market, not unless you live under a rock, in which case it won’t affect you anyway. News travels fast and stories of the downturn in US real estate markets is quick to hot South African shores where people are now, as a result of the phenomenal property boom experienced in local markets over the past few years, sensitized to real estate and the wealth creating benefits thereof. As news hits our shores many are contemplating how the US down turn will affect the local property market.
To put things in perspective, we all know that when something of major significance happens in major markets that drive world economies, the effects will ripple throughout the world. As the ripples that emanate when a rock is dropped in water, market events in these markets eventually reach FAR off shores. There is not much anyone can do about this, it is just the way it is and has always been.
However, in every market there are factors that carry major events, such as the recent downturn in US real estate markets, further than normal. Factors such as market moods and emotions, media, fear and other non-tangible factors. These factors often have the effect of perpetuating ripple-effects well beyond their natural reach. In this manner, the effects of market events, often travel even further than expected and actually increase in volume as apposed to dissipating.
This is much the case with the South African property market, ever since news of the downturn in US real estate markets people have been contemplating the effects and the speculations have been growing. Some theory’s are realistic, yet most are way out of the ball park.
So, what is the real effect of the American property market on South Africa?
Some say none, I beg to differ, some say major and I beg to differ on that also. The reality, as normal, usually lays someplace in between.
Without writing a long essay explaining the history of the American property market and why it landed in this state, it must be understood that markets in different countries work under different environments, regulatory, economic, financial, etc. Therefore, a direct and immediate effect of the same nature – can’t possibly happen. Simple logical reason: South Africa has to be firstly in the same exact situation as the US for events to unfold in the same manner, and since it is not and never has been, I wager that we will not see turmoil to the same extent as the US in South Africa.
So, why are we then linking the US to the current South African property market?
The biggest and most dangerous effect that any market always faces is of human nature, it is called “mood” or “market emotion”. If emotions start running high due to fear of loses, change in trends and is compounded by excessive negative media, it will invariably trigger action. Any actions under negative “mood” conditions are usually not actions of positive nature, nor logical for that matter. In many cases the human survival instinct kicks in to reduce damage, survive a down turn, when a down turn may not even exist in a certain region or country, but the market “mood” will prevail and control peoples emotions.
Of late, we have heard much negative rhetoric of “negative mood” type talk in the property market. Is in not ironic that it happens to coincide with US market mood. It is true to say that major markets such as the US directly trigger some of the talk. However, I feel that local factors such as the NCA, increases in interest Rates and escalating property prices are having more of a dampening impact on local market conditions than news from far off shores.
So, while we do live in a global village and people must look at similarities in markets to determine what to expect, it cannot be a for gone conclusion that changes in local market conditions are solely as a result of events taken place in major markets. To conduct analysis purely on this basis, without local context, is the catalyst that creates the overwhelming emotion that will inevitably change market direction; “what if this will happen here?” is the first thought. Before you know, the message spreads and more people hear the news and take it at face value without research, analysis or independent thought. Next when you look, the the market is in a downward spiral.
There is no one to blame in this game; it is the way it works. However, to win the game many more considerations are required when looking at localized markets in any country.
So where does this leave the South African property investor?
Due to the factors considered and outside influences, now more than ever, South Africa’s property investors need to understand and educate themselves more on the local context down to the specific areas in which they invest. Big picture issues, such as inflation, global markets, should never be ignored, but instead placed in the correct context. To do that correct knowledge and a clear mind is necessary.
The truth in any market only lays in the full evaluation of the circumstances, in context. Anything else and investors risk spiraling down with the “negative mood” which may have been initially created so far away that all bets are off in local context, but no one notices anymore.
That said, the South African market has its’ own problems, but they are not all the same as the problems the US markets face.
In the US, due to low interest rates, many people have refinanced to a point where they are over exposed and have bonds of 150% of the property value. That can’t possibly be a good thing, but that is not the case in South Africa.
In South Africa, where bonds of 108% (include purchasing costs) are the maximum that banks provide lenders, property owners are not in a position where they are mortgaged to the extent the Americans are, far from it.
Nevertheless, South Africa has different problems. With property prices growing phenomenally in the last few years, interest rates increasing and the NCA putting a stop to reckless lending, there are fewer buyers in the market. This does put pressure on the sellers and if a seller needs to find a buyer fast due to financial difficulties, they may have to settle for a price that is below Market Value. Though this may not be good news, especially for investors that need to release stock and cut down shortfalls due to increase in interest rates, the situation is far from the American “doom” story, so far that it is unfair to make local comparison.
Some local investors and home owners have purchased properties that they may not be able to sell fast, right away, nor at the prices they planned and wished to sell. However, this is normal and in no way a sign of impending avalanche type disaster. Some areas in South Africa could are in a “housing bubble” that has burst, but that does not put the entire market in a down turn mode compared to the US. In fact there are some areas in South Africa that will not even see the local market recession.
If you are looking for advise on what to do under current circumstances there are only a few words of wisdom that one can offer right now. Everything else is up to your wisdom, education and correct evaluation of the property deal, the area, and putting matters in perspective.
- When you read about property markets keep things in perspective to the South African context, as not everything everywhere applies to everyone.
- When you listen to economists understand their point view of macro economy, not micro economy, and put things in perspective to your regional context while trying to understand the bigger underlying market forces.
- If you are in any sort of negative or scarcity mood, don’t close deals unless you have a clear mind and strategy.
- Last but not least, educated yourself about investing in up markets as well as down markets, this is the only full proof system. The only way in which news of any mood will never over impact on your investing success.
With cool head and knowledge you will be able to shift and change your buying patterns profitably, according to current market trends.