How the recession could affect the property market
What is a technical recession?
A technical recession occurs when a country undergoes two (or more) quarters of negative growth. In February this year, Treasury forecast 1.5% growth for the economy in 2018. This is looking unattainable now after the economy contracted by 0.7% in the second quarter of 2018, following a 2.6% contraction in the first quarter of the year. In other words, the economy is shrinking when we desperately need it to be growing.
Consumers are cutting back on spending
Consumers have this year been battered by a VAT increase, massive fuel price hikes, high unemployment and low growth. As a result of all this, consumers are tightening their belts and household expenditure decreased by 1.3% in the second quarter of the year. Households cut back on products like transport, food, beverages and clothing. The recession brings with it the risk of more financial pain for the average South African.
The risks to the property market
- A weaker rand
The rand has been under pressure recently and the currency slid further to above R15 to the dollar after the recession was announced. A weak currency puts household income under more pressure since it makes imports like fuel and maize more expensive. Financial pressure makes it more difficult for buyers, especially first-time buyers, to get on to the property ladder.
- An interest rate hike
The Reserve Bank’s Monetary Policy Committee (MPC) meets later this month to make a decision on interest rates. At its last meeting in July, the MPC kept the repo rate unchanged at 6.5% per annum. The MPC now faces a tough decision, lower interest rates to try and stimulate the economy or raise them to protect the country from the inflationary pressures of the weak rand. If interest rates are raised, it will be another blow to embattled consumers.
- Credit-rating downgrade
The recession has increased the risk of a downgrade for South Africa by rating agencies. With the 1.5% growth forecast for the economy looking increasingly unlikely, keeping within the budget target is going to be difficult. If the ratings agencies feel that government is unable to stimulate growth or stablise debt, it could lead to a ratings downgrade in October. This will in turn, lead to billions of rand being pulled from the country.
- Negative home equity
Negative equity occurs when the market value of a property drops below the outstanding mortgage amount on it. Although negative equity situations in South Africa are fairly unusual, the risk does increase in a recessionary environment and homeowners should be aware of this. With the exception of a few areas, property price growth in the country has slowed over the last few years. Much of the country is already experiencing a buyer’s market – meaning there are more properties for sale than actual buyers.
If the economic situation continues to deteriorate and homeowners find themselves under financial pressure, more properties for sale may enter the market. With supply exceeding demand and desperate sellers, property prices may start to fall and negative equity may become a reality for some. If prices do start to fall, homeowners that can afford to should stay put and wait for the market to pick up again. In order to cope, they will need to prudent with their money and live within their means. They should focus on cutting down on unnecessary expenses, avoid taking on additional debt and put any spare cash they have into their home loan.
Should you buy property now?
The answer to this depends very much on your personal circumstances. It’s tough out there financially and it may be a while before things start to improve, so potential buyers will need to take a realistic look at their financial situation before making a decision. Now is not the time to be taking financial risks so those that plan on buying should choose a property that is well within their budget, and ensure that they leave themselves a buffer in case things deteriorate further.
Once you have established a budget that you can comfortably afford, you should research properties in the areas that you are interested in. Property portals are an excellent resource to research asking prices in a particular area. In addition this this, you should speak to local estate agents and view as many properties as possible before making a decision.
The good news for those who can afford to buy is that there may be some excellent purchasing opportunities in the next few months. Property prices haven’t grown much this year and with fewer buyers in the market, they will be in a strong position to negotiate and pick up a potential bargain. Those that do decide to buy should put a large deposit down in order to avoid the potential for negative equity.
Should you sell your property now?
Again, this would depend on your personal circumstances. With more properties on the market and fewer buyers, it is unlikely that you will make massive profits. If that is important, and you are not in a rush, then waiting for the market to pick up again is the best option.
If you are serious about selling now, you will need to price the property realistically, ensure the property is in the best possible condition, enlist the help of a professional agent and give consideration to all serious offers.
Is there light at end of the tunnel?
The good news is that things are expected to improve soon, with many economists expecting the country to emerge from the recession in the next quarter.
Finance Minister, Nhlanhla Nene is confident that the economic situation can be turned around with the structural reforms that are being put in place, and the president has prioritised a stimulus package to revitalise the economy.
Even if the country emerges from recession soon, it may be a while before we see a substantial improvement in the financial outlook. Homebuyers should therefore exercise caution and buy within their means, after doing extensive research on the market.
Author: Extracts - Private Property