RESIDENTIAL PROPERTY AS AN INVESTMENT
South Africans are well known for their love of property. In fact, many large overseas based property groups have sought a secondary listing on the JSE, despite not owning any local (South African) property in their portfolios. They just know that listing a property company on the JSE in South Africa is an “easy” region to raise capital.
For many years the local property sector was the top performing sector on the JSE. Investors in listed property, have however not had a good time of it of late as, despite a very healthy recent rebound, listed property has still delivered negative returns over the last seven-year period. In this month’s Financial View, we look at whether residential property has performed any better.
The investment case for residential property
We live in a world where interest rates are currently sitting at artificially low levels. Governments and central banks around the globe have used an easy monetary policy to try keep their economies on an even keel and assist with recovering from the twin impacts of the 2008 Global Financial Crisis and now the recent Covid pandemic.
South Africa is no different to our peers in that our interest rates are also very low at the present, in fact the Repo rate is, at the lowest rate since it was introduced in 1998. Low interest rates make financing a little more affordable as the monthly instalments would be less as the interest component of those instalments would be lower. The ability to access lower cost financing should in theory encourage investment into any asset class where financing is typically required with the property market the biggest asset class where investors raise finance to purchase the asset.
When the interest rate is low it should increase demand for property as an investment class and the excess demand should result in pushing prices up higher. Effectively by using financing to buy an asset you are leveraging the bank’s facility to increase your wealth.
What has actually happened?
Our local residential property market is well researched with both FNB and ABSA releasing monthly reports analysing various ratios and factors affecting the property sector. The FNB Property Barometer looks at residential house prices for completed sales with a dataset that includes the last 20 years.
The blue line in the chart represents the year-on-year change in the FNB Monthly House Price Index (calculated as percentage for the year-on-year increase/decrease). The darker line is the Consumer Price Inflation as released.
What one can see, and maybe what has driven our love for property, is that in the first six years of the chart (the early 2000’s) we had a period where the property index reflected increases which were well above inflation. This was a great time to invest in property as property prices soared and delivered real wealth to the homeowners and the owners of property. This however changed in 2007 and since then property price increases have hovered around the inflation rate. Over the last decade owning residential property has not generated any significant excess wealth, especially as the prime overdraft rate was always higher than the rate of inflation.
We’ve had a decade of low interest rates yet at the same time the demand for residential property has remained relatively low.
What has caused the pressure in the residential property market?
One can probably sum it up in one word – “politics”. The economic policies that are currently in force in our country create uncertainty and make investors reluctant owners of assets that are fixed on the ground. Liquid assets that offer more flexibility and are easily convertible into cash (and easier to send overseas in the instance of emigration) are the preference.
This is borne out in the ABSA Homeowner Sentiment Index report which indicates the consumer confidence level regarding the property market in South Africa.
The overall sentiment of 81% as they reported in their last report is the highest since the start of the sentiment index in 2015. Yet the negative factors jump out at you – an unstable economy and land expropriation without compensation makes property an uncertain investment…..
Where do we think things are heading?
Local property prices are relatively low when compared to the prices of property in other countries. There does seem to be an improvement in the property market recently with more sales in the R 700 to R 1 500 000 sector being completed. For-sale signs are standing for shorter periods of time on the pavements; the property index has ticked up above inflation for the first time in the last five years; and the sentiment index is up.
Whilst we probably will see a tightening of monetary policy soon with an expected rate hike on the horizon interest rates will still remain low against historic long-term averages. Does this mean a boost to the residential property market? We don’t think it will. Economic policy and certainty of ownership need to be fixed to benefit the property market. The last time we had a really booming property market, real interest rates were low and heading down. During this period the economy was growing in excess of 5% each year, there was a positive mind set and there was confidence in the ability of the government. As a caveat – always remember that with all types of investments price is what you pay and if you buy value and you get a good deal you often earn a good return.
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