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May 2015
Housing
B
ut, Loos cautions, this should
not be interpreted as some
kind of crash in home values.
“Many housingmarket corrections
take place slowly in real terms,” Loos
says, “often over a number of years
one gets slow house price inflation,
which remains below the general
rate of inflation in the economy, Con-
sumer Price Inflation (CPI), or wage
inflation.”
This means that, while house
values may be rising, in real terms
when adjusted for CPI inflation they
are declining gradually, thereby in
effect bringing about a gradual move
to lower real home values.”
Loos notes that the previous
big downward correction of the
1980s/90s took place over almost 15
years, from1984 to 1998. This created
a very low real house price base and
we sawone of the biggest house price
growth booms from 1999 to 2007.
To understand why Loos believes
that a significant downward real
home price correction is due, one
needs to appreciate the extreme na-
ture of that 1999 to 2007 house price
boom and the driving factors.
The boom had its foundations in
two structural economic changes,
we had a political settlement leading
to democratic rule in South Africa,
and this brought about the end of
the country’s economic isolation
through disinvestment, boycotts and
sanctions.
This meant that we could nor-
malise trade and business ties with
the world, export and investment
performance improved as well as
economic growth, employ-
ment and household in-
come growth. Then, in the
late 1990s, the South Afri-
can Reserve Bank (SARB)
moved to an official infla-
tion targeting regime, and
its strategy of trying to pro-
tect the value of a volatile
Rand, with often extreme
interest rate levels. With CPI
inflationhaving beenon the
decline from the late 1980s
onward, this policy shift
meant no further need for
the extreme high interest
rates of the late1990s.
Loos says, the result was
a major once-off downward
structural adjustment in in-
terest rates, which started in
1998.
The interest rate stimulus was
massive, with the indebted House-
hold Sector able to grow its borrow-
ing rapidly. This created a strong
surge in demand for what were then
cheaper homes.
The strong double-digit house
price inflation that followed, com-
binedwith low interest rates, created
a paradise for speculative activity,
while first time buyers were con-
cerned that future prices wouldmake
homes unaffordable. The result was
a real house price peak at the end of
2007 that eclipsed previous recorded
prices in the country.
Loos explains that the down-
ward correction was cut short by
an abnormal fiscal and monetary
stimulus across much of the globe.
Domestically the South African
government widened its fiscal
deficit and the SARB cut inter-
est rates to multi-decade lows
in order to “keep the economic
party going”. This delayed the
full correction. Current real
house price levels still reflect
that 5%+ annual economic
growth phase that we were
fortunate to have prior to
2008, as well as perhaps some
speculative activity and the
first time buyer panic fromthat
boom era.
“We have reached the point
where the stimulus is running
out. Government has begun to
raise taxes in order to narrow
the deficit and curb its debt
growth and SARB aims to start
‘normalising’ interest rates
upwards. The world’s biggest
economy, the US, looks set to do
the same fairly soon. With the disrup-
tive social tensions in the country, we
appear destined for a 1-2% growth
economy at best, instead of the pro-
jected 5%.” Ultimately, he believes
that real house prices have to reflect
economic weakness and absence of
further fiscal andmonetary stimulus.
Loos concludes, “The result has been
what appears to be a disappointing
start to 2015 economically and the
pace of residential sector strength-
ening has slowed. The market still
remains a ‘comfortable space’, but
perhaps the time is near for lower
single-digit house price growth, and
for the longer term real price correc-
tion to gradually resume.”
■
Time
for correction
While the residential property market remains
solid, growth in this market appears to be
gradually running out of steam, and the time
for a more significant ‘downward correction’ in
real house prices is due, says John Loos, FNB
Property Economist.