Now is a great time to do property business

The speaker was John Loos, property economist at First National Bank.  To the surprise of many present, after giving what Brock described as a highly realistic and certainly not overoptimistic summary, Loos ended on a very positive note saying that “now is quite definitely the time to make the most of great opportunities because the future will be an improvement on the present”.  By implication, he added, this means that today’s residential property prices are often at bargain levels and are unlikely ever again to be so low – although currently stuck at present levels.

Loos began his presentation with an “Acceptance Cycle Clock”, showing how the average man reacts to ‘boom-bust-good-times-bad times’ cycles.  The good times are characterised by confidence and a willingness to buy and expand.  As bad news becomes prevalent and the market slips backwards, typically, said Loos, people will react at first by denying the realities, then with anger and possibly aggression, depression and confusion.  In time these will give way to a willingness to bargain, to an acceptance of the current conditions and finally a return to normality.

The South African residential market, said Loos, is at the moment at least partially still in the denial/confusion/depression phase, but it is showing signs of moving on.

Relating South Africa’s situation to that of the global economy, Loos showed that US debt had risen to an all time high of± 400% of GDP - and, he said, although bank lending has been largely blamed for this high, high oil prices are also responsible for it.  The current trend leading to today’s price of ± $120 per barrel has, he said, inevitably been accompanied by a sharp drop in growth and economic prospects.

Future South African growth rates, added Loos, are unlikely to be bullish as the current trend is still downward.  South African Household debt, although improved, still stands at 75% of GDP and demand for housing is still ‘mediocre’, with only 10% to 15% of agents reporting active trading.  However, a far higher percentage now see the market as ‘stable’.

On average it now takes 17 weeks to sell a home, whereas in the 2006/2007 boom the time was just under 8 weeks.  Nevertheless, despite this and despite 2011 figures showing that demand is still weak in relation to supply, a large percentage of sellers, said Loos, still hold unrealistic price expectations for their homes.  In the end 91% of those who do sell do not, in fact, achieve their asking price.

Particularly disturbing, said Loos, are the figures showing that in the third quarter of 2011, 19% of sellers were downscaling due to financial pressure - a sure indication of the weakness of today’s economy. The good news is that this figure is way off the 33% peak of 2009, and has decreased from 25% in the second quarter of 2011.

FNB’s figures also showed that there has been a drop in the percentage of those emigrating - possibly, said Loos, because middle class job opportunities overseas are now very limited.
The latest FNB house price index indicates nominal growth of 5,6% this year.  This means that real growth has been almost nil, i.e. around 0,3%.  Other data sources point to a figure slightly below zero.

In the light of these figures on what grounds does Loos adopt his ‘now is the right time to do business’ approach.  The answer, it seems, is that his confidence is based on the efficiency with which the South African fiscal management has been handled.  In the 1990s, he said, debt reduction was carried out extremely efficiently, particularly in cutting the wasteful defence force budget.  

Now infrastructural inadequacies are being tackled (even though the Eskom solution is costly) and the economy, by diversifying widely, has gained strength.  South Africa’s financial sector is ranked number six in the world, 2,5 million homes have been built since 1994 and more are in the pipeline.  Our communications and transport are relatively efficient.   Above all, perhaps, we have abundant natural resources and our democracy is still intact, with a free press still stirring things up wherever necessary.

All these factors, said Loos, are precursors to a recovery in the economy.  He did, however, warn that the massive discrepancies in income and living standards in South Africa pose a very real threat to future stability.  The number of South Africans currently living in real poverty is now well over 15 million, i.e. some 40% of the population.  Although this is an improvement from the ± 50% of 2002/2004, it is likely to lead to populist financial policies being propagated and possibly accepted by a substantial portion of the voting public. This, said Loos, is a very real threat to South Africa’s future growth projects and its attempts to lift itself out of pure Third World conditions.

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