Comment – By economist John Loos (Part One of Three)
News > news - 18 Jan 2008
Into 2008, and as yet little sign of the 3-year+ broad slowdown in the residential property market coming to an end. As things got worse in 2007, so the talk regarding possible house price declines, rising bad debt in the housing market, further upside risks to interest rates and prospects for a slowing economy, and the negative impact of the National Credit Act, seemed to escalate.

Understandably, therefore, many property owners are concerned about where it’s all going to end.

Human beings are often prone to doing their mental forecasting by extrapolating a recent trend in a straight line into the future. Fortunately, real life doesn’t work in this manner. Rather, cycles are the order of the day, and my view remains that 2008 is the year in which the cycle will bottom out and begin to turn for the better.

But let’s consider the risk of a crash in residential property. Well, firstly, it may be comforting to know that residential property crashes are not common. In fact, in over 40 years since the mid-1960s there has only been one, and that was in the mid-1980s. Already, therefore, this would suggest that the chances are slim.

Examining Absa figures, one sees that since the early-1970s it was only once in 1984/85 that SA experienced a nominal house price decline. That was at the end of a major slump from a price inflation level in excess of 40% in 1981 to deflation of -9% at a stage in 1985.

In real terms (deflating the house price index using the CPI), however, price deflation is far more common. We saw a significant real house price decline in the latter half of the 1970s just prior to the gold-boom-drive housing boom, the slide of 84/85, and further gradual real decline over much of the 1990s to a low in 1997.

Nevertheless, only the mid-1980s slump could possibly be crash, so it is worthwhile considering its causes. The 1970s through to the early-1990s was a time of stagnating long term real economic growth, as the country’s political situation worsened and isolation and boycotts started to bite, not to mention all sorts of structural rigidities created by restrictive Apartheid legislation at the time. Making matters worse was the onset of commodity price slump from the early-1980s.

If one were to calculate the sum of national GDP for 5-year periods, and then calculate an average annual growth rate for these 5-year periods, thus cutting out short term growth cycles, it is clear that from the early-1970s onward the economy (al important to the housing market performance) was becoming less and less supportive to the property market in SA

Bar a very short period of spectacular economic growth during the gold price boom of the early-1980s, of course. Mining was a more key industry in SA in those days, and it was little surprise, therefore, to see real GDP growth touch 6,6% in 1980 followed by 5,4% in 1981. In fact in one particular quarter, year-on-year GDP growth was close to 8%.

But it was all set to end in tears. The gold-boom-driven economic boom was short-lived, proving to be a mere blip in a period of longer-term growth stagnation. The housing market began to slide after peaking in 1981, as the economy slid into a recession in 1982/83. The stay of execution came towards 1984, with the economy experiencing a brief recovery, but by 1985 the negative forces were far too great. Not only did GDP growth slip back into negative territory in 1985, never to really impress again until the current decade, but extreme interest rates also contributed to the end of that property party. From 1981 to 1985, prime rate had risen by 10,5 percentage points from 11% to 21,5%.

If that wasn’t enough, individuals’ confidence in the country was not exactly at all time highs, as we headed nearer to Rubicon Speech time in the mid-1980s.
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