Is S.A. Part of the Global Property Market Bubble
Scott Picken
5 July 2005

A recent article in the Economist reported that the worldwide rise in house prices over the past five years is the largest “bubble” in history, bigger than the global stock market bubble in the late 1990s.

In the past 5 years, the total value of residential property in developed countries has increased by $30 trillion, or 100% of the countries’ combined GDPs. If the bubble bursts, how would this affect the South African property market – currently the fastest growing property market in the world?

"No matter how healthy the South African residential property market is, the factors supporting the market are not sufficient to protect it against a residential tsunami from the US," says Erwin Rode, economist and property valuator from Rode & Associates.

The growth has largely been fuelled by two main factors: low interest rates, and a loss of faith in the stock markets.

Although interest rates in the USA are set to rise, they can only go up marginally before they start to have a throttling effect on the new growth spurt in the US economy.

However, in Europe, underperforming economies coupled with weak demand and falling inflation are putting central banks under pressure to cut interest rates; last week Sweden led the charge by dropping their rates from 2% to 1.5%. As 40% of South African imports are from Europe, a weaker Euro will suppress inflation & keep interest rates down.

South Africa’s interest rates remain relatively high by international standards, but seem to have stabilised after a record 26 consecutive periods of economic growth.

These interest rates adjustments are creating a stabilising effect in which property growth is more in line with inflation and general economic growth, as has been found in Australia and the UK (two of the original property boomers) over the last year.

South Africa has its own peculiarities, though. The housing boom started from a particularly low base: property prices in 1994 were grossly undervalued. According to Elna Moolman, the head of South African economic research at Standard Bank: “the demand for (and consequently prices of) houses will continue to be supported by strong albeit decelerating consumer demand.

This, in turn, is underpinned by firm rises in disposable income, favourable financial conditions and structural changes in the economy.”

The SARB recently revealed that the ration of household debt to disposable income has dropped from a historical high in 1998 of 62% to its current level of 54%. The number of first time buyers entering the market (a healthy sign in a property market) has risen from 26% at the end of 2004 to 32%, although this does create a dampening effect on the rental market.

This is evidence of the growth of the emerging black market, supported by a recent FNB property report: “The lower price segment (up to R750,000) was the last to catch fire, while the tempering seems to be far more pronounced in the top end of the market.”

As long as the economy continues to grow at a its current pace, and barring an American Economic Catastrophe, the market as a whole should continue to grow, albeit at a more sustainable pace.

Or, according to property economist Francois Viruly, “Gross domestic product growth will continue to drive the market, especially at the lower to middle end of the market.”

The most important element to consider is that the market is stabilising and has changed and there is no longer the ability to speculate and make large returns in short periods. As always, property is a long term investment and one needs to do the financial analysis, understand the risks and do thorough research to ensure the long term profitability of investing in property.