Positive economic indicators could trigger a property market turnaround

12 September 2017

Statistics released by Stats SA on 5 September 2017 have revealed that South Africa is officially no longer in recession. The announcement of a 2.5% annualised economic expansion during the second quarter of this year joins other positive indicators including a decrease in consumer price inflation (CPI) and a drop in the repo rate.
Positive economic indicators could trigger a property market turnaround

While consumers may be hard pressed to spot any immediate effects in their bottom line, this combination of economic factors could have a very positive effect on property market activity.

It's early days, and too soon to make any definitive claims, but this may be the first step towards a turnaround in the national property market. The industry has had a tough couple of years with a nationwide market contraction, but economic growth and increased consumer spending power could be enough to boost the market upwards again.

Lower CPI inflation

The decrease in CPI inflation combined with a growing GDP should take some pressure off consumers and improve their ability to save. This is a vital step for those hoping to purchase property, as deposits, transfer fees, legal and bank costs generally require a considerable upfront payment.

CPI has dropped below 5% for the first time since late 2015. Price increases for everyday purchases - groceries, transport, utilities and basic services - are finally slowing in their meteoric climb. Things aren't getting cheaper, of course, but lower inflation and a more buoyant economy means that over time income will go a little further, bonuses and salary increases will have more of an effect, and it'll get just that little bit easier to put some money aside every month.

This isn't the only positive effect a lower CPI has on property purchasing power, however.

Interest rates are closely linked to CPI. If inflation is too high, the Reserve Bank is likely to increase interest rates to slow it down. When the CPI decreases, however, they have also been known to drop interest rates to keep inflation within their target of 3-6%.

Interest rates were already cut by 25 basis points in July 2017 after a surprise decision by the South African Reserve Bank. The decreasing CPI now has experts speculating on further cuts in September, which could bring home loan base interest rates as low as 10%.

This could have a huge effect on the affordability of finance for consumers, and make property purchases quite a bit cheaper in the long run.

This, combined with the recent deceleration in average house price growth, could see property investments heading towards their most affordable levels in years.

Natural price correction

We've had three consecutive years of slowing house price growth, and two years of effective house price decline when you adjust for consumer inflation. This isn't entirely due to the economy - there's also a bit of natural price correction going on: a common phenomenon after a period of high growth when market dynamics swing back in favour of buyers, and essential for preventing unchecked real estate growth "bubbles"

The result, however, is that house prices effectively remain at 2015 levels thanks to negative (CPI-adjusted) price growth. Buyers also have greater negotiating power given the relatively low demand for properties at present.

Add to that the effects that the decreasing interest rate and growing economy have on property affordability and consumer spending power, and it's reasonable to assume that we'll be seeing an increase in property market activity soon.

As for long-term forecasts, much rests on the economic impact of political events scheduled for the end of this year.

We're optimistic that the rand, our economy, and the property market will remain resilient, but only time will tell for sure.

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