SA’s property market in a post lockdown economy
Expecting the worst is human nature. Behavioural Economics and Prospect Theory teaches us that to our risk averse brains, the psychological pain of losing is about twice as powerful as the pleasure of gaining. This not only influences how we behave as
consumers, favouring ‘ purchases over what appears to be risky ones, but also on how we view the future. By expecting the worst and applying what Behavioural Economists have coined ‘worst case scenario planning’, we effectively prepare our brains to handle a potentially dismal future.
The world recently dished up the perfect example of ‘worst case scenario planning’ when we were dumped into a global crisis. During the first few months of the Covid-19 pandemic, most people agreed that the effects on the economy would be, to put it lightly, bleak. The South African property market was no exception and buyers and sellers alike felt the weight of the predicted carnage to come.
In May this year, Business Insider reported a dreary outlook: “If the SA economy shrinks by 6% this year (the Reserve Bank is currently predicting a 7% contraction) …average house prices will decline by 8.8%. In a worse case scenario, where the economy contracts by 10% (as some economists think is more realistic) and the central bank starts to reverse its recent rate cuts as inflation heats up house prices could lose 14.5% of their value.”
However, as South Africans and our battered economy started emerging from one of the hardest lockdowns on the planet, it turned out the predicted carnage was exactly that, a mere prediction. Make no mistake, we still have a long hard road ahead, but it certainly appears that those worst case scenarios overshot their predictions by a fair amount and a cautiously optimistic outlook seems to be o n the cards.
As FNB’s Property Economist Siphamandla Mkhwanazi was happy to report: “Our initial expectations were for the pandemic to have a more chilling and lingering impact on activity, with pent up demand filtering through only later this year. In contrast, the
volume of new mortgage applications has rebounded beyond the pre lockdown levels and across the price spectrum.”
According to FNB’s Property Barometer for November 2020: “Despite the pandemic, industry wide data shows bourgeoning home buying activity, with the volume of mortgage applications reaching multi year highs. Year to date, applications volumes are approximately 9% above the same period in 2019.”
Various factors contribute to this rise in buyer demand, like SA’s Reserve Bank’s slashing of the interest rate by 300bps to 7%, the lowest it’s been in 50 years. Many potential buyers who may have been hesitant before lockdown, are now jumping at the opportunity to take advantage of this. And why wouldn’t they? With prime at only 7%, repayments on a home loan of R1 million
could be as low as R7,600 p/m, where a few months ago, that number would’ve been around R10,000 p/m. Potential buyers are waking up to the fact that in some areas it’s becoming cheaper to buy than to rent.
The willingness of Banks to now offer 100% bonds to qualifying buyers is also starting to show results and roughly 1.3 million customers have been offered payment breaks by South Africa’s four major banks.
Taking all this into account, it really does seem like the effects of lockdown will not be as dire as our risk averse brains first believed.
However, factors influencing the markets seem to be flying in from all directions and borrowers would do well to think on their feet.
Take for example the rampant effects on the world markets of the recent vaccine breakthroughs, one by Pfizer and one by Moderna (effective 90% 95%) and a third by OxfordAstra Zeneca (70 90 success rate), sending the Dow Jones Industrial Average soaring and the price of oil climbing. The impact of these vaccines on SA will be top of mind during the Monetary Committee Reserve Bank meeting of 21 January 2021 and will no doubt greatly influence their views on the SA economy, interest rates and inflation
targets post Covid-19.
The interest rate cut was made to assist the economy through the Covid 19 lockdown, a decision which for now seems to have worked. But borrowers would be well advised to assess their debt and consider the possibility of higher interest rates by the end of 2021, depending on the Reserve Bank’s outlook for the economy, inflation, and overall risks.