In an interview Paul-Roux de Kock, Analytics Director for Lightstone had with Warren Ingham from the Honest Money Podcast, he highlights that despite a dismal few months from a property and auto performance perspective, there is potentially light at the end of the post lockdown, 2020 tunnel.
“At the beginning of the year, it looked like both the property and auto sectors were set up for a good turnaround year in market activity. Obviously, the national lockdown threw that to the curb and with COVID-19 being a black swan event, it was difficult for us to forecast what the full ramifications of the lockdown would be. Since the hard lockdown has lifted however, it’s been really positive to see that the combined new and used vehicle sales activity for June to September in the auto sector (the property data takes slightly longer to reflect due to the extended transfer process), has been comparable to January this year,” says de Kock.
De Kock advises that in order to get back on target from an industry forecast perspective, businesses will need to overshoot their targets in order to make up the losses from parts of March and May and the whole of April – which showed almost zero activity across both market segments.
From a property perspective, although the data is not yet reflecting all transactions from the last 3 months, anecdotally estate agents are saying that work from home environments are affecting property purchasing behaviour as people move towards houses that offer cottages or separate buildings attached to the same property. De Kock says that based on the recovery of previous economic crashes, activity in the luxury property market tends to be the leading indicator of market recovery. “The luxury segment of the market tends to lead the rest of the market by about 2 months as this sector is generally more price sensitive due to smaller buyer and seller ‘pools’. Although house price growth in the luxury market tends to decline first, it generally recovers sooner which we’re hoping will be the case post this economic shock too,” he says.
Warren Ingham – Executive Director at Galileo Capital has traditionally steered away from residential property as investment options. He was surprised to hear De Kock highlight estate or closed communities as a key part of the property market that has been relatively buoyant in performance during economic downswings. He specifically mentioned that with luxury estates generally being less affordable now than during the 2008 market crash that sectional schemes with strong security aspects will remain an area of the market to watch closely.”
From a regional standpoint, De Kock revealed that the Western Cape and Cape Town came out of the 2008 crash significantly sooner than the rest of South Africa showing double digit growth in subsequent years. Today, these Western Cape areas are performing closer to the national average of around 2.1% with a provincial house price growth rate of around 3.8%. More recently, however, KwaZulu Natal has overtaken the Western Cape with a 5.2% house price growth and surprisingly, although a considerably smaller part of the market, Mpumalanga is outperforming all the other provinces with a 6.0% growth rate.
“We are seeing duel pressure in the lower end portion of the property market as people choose to downscale from higher valued segments while at the same time we’re also seeing upward pressure of new buyers out of the informal housing sector making purchases in the formal affordable segment – specifically in rural areas, traditional ‘townships’ and within settlements on the outskirts of bigger metropoles,” says De Kock. “Structural outperformance trends like the ones highlighted for the Western Cape and that of the lower end affordable segment of the property market tend to last between 4-5 years respectively with more localised, granular growth spurts not lasting as long.”
From previous market crashes and recoveries, De Kock points out three main themes that drive long term house price growth, namely: • GDP growth • CPI growth and • Movement in interest rates
Based on scenarios produced for their clients, Lightstone’s best case expectation on GDP performance was estimating a drop by 3% for the year. This was expected to result in consumers generally tightening their belts and a deflationary effect on CPI prompting the Reserve Bank to respond by reducing interest rates by 300 basis points. “If that scenario plays out it will result in a forecasted 3.9% drop in house price growth for the year which may sound depressing for a “best case” scenario. I must point out however that when comparing it to 2008, when GDP dropped by only 1.8% and house price growth by a massive 5.4%, it is actually quite positive that the early indications of property sales registered post-lockdown, hints that we might be tracking closer to this scenario than the mid-road or more pessimistic scenarios.”
“When the national market isn’t performing well like even before we went into the lockdown it’s very important for consumers to try to look for the golden nuggets in the market by doing granular research, via Estate Agents or directly from the valuation and area reports available on Lightstone’s website,” de Kock concludes.
