How sentiment affects the property market

“Consumer confidence can be best described as the degree of optimism that consumers have in the state of the economy relating to their personal financial situation. If consumers are not optimistic about the economy, they are likely to err on the side of caution and avoid entering the market, which is exactly what we have seen in the property market over last few years.

On the other hand, if consumers are confident about an economy which in turn ensures them of the stability of their personal income, they are more likely to increase their spending. Consumer confidence is probably one of the most important indicators of the health of an economy,” according to Adrian Goslett, CEO of RE/MAX

South African consumer confidence results are derived from individual interviews of an area-stratified prospective example of 2 500 households in metropolitan areas, cities, towns and villages throughout the country. The index represents 92% of the urban adult population and 53% of the total adult population.

With negative media reports and predictions from economists, there is no doubt that consumers confidence in the property market will be waning. Goslett says that although the Reserve Bank has kept interest rates low and steady over the last year to spur spending, many investors are still reluctant to get back into the market.  

“Reports of a double-dip recession scenario in the US as well as other influences may push the consumer confidence in South Africa down, which would result in a delayed economic recovery,” says Goslett. He notes however, that while South Africa is not immune to foreign economic pressures, it’s recovery should be much quicker than its international counterparts, due to limited foreign exchange exposure.

Consumers represent approximately two-thirds of expenditure in the South African economy, which is why a drop in confidence and spending may challenge economic growth. According to the First National Bank, many consumers expect the economic performance to deteriorate and some of these foresee that this will also hurt their own finances over the next 12 months.

According to the FNB/BER (First National Bank/Bureau for Economic Research) consumer confidence index, during the third quarter of 2011, consumer confidence dropped from 11 in the previous quarter to a two-year low of four. In the second quarter of this year it had improved to 11 from 9 in the first quarter. “While the confidence level dropped in the third quarter, it is still a marked improvement from the numbers seen in the middle of 2008, where confidence levels were at -5, which points to the fact that we are a long way from where we started at the beginning of the slump,” says Goslett.

“What investors should remember is that while we can’t accurately predict when it will be, the property market will recover and has in fact largely recovered from the bottom of the slump already. There are still a few hurdles we still need to overcome but the market is poised for recovery.  Although consumer confidence could fluctuate from quarter to quarter, property is still an asset that has continued to outperform other asset classes over the long term. More money was made by investors buying property in slumps and selling in booms, then those who bought and sold in a boom,” concludes Goslett.  

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