Stats SA has just announced that the country’s unemployment rate has again increased. Although by only 0.8 percentage points up (Q1:2024) from the fourth quarter of 2023, it brings the official unemployment rate to 32,9%. This is incredibly high when you consider that a reasonable unemployment rate for a country is considered to be between 3-5% (Forbes).
High vs low
Unemployment is an economic trend that definitely impacts the property market, and particularly property values. When it is high, the number of potential buyers decreases, leading to depressed prices. When it is low, wages increase, increasing affordability and entry to market, which in turn can lead to an increase in demand and an increase in prices.
While we cannot specifically say by how much each upward percentage in the unemployment rate changes market participation, simulations done elsewhere in the world may offer some insight. One such, undertaken in 2018 by Gan Li, Wang Pengfel and Zhang Quinghua from three universities (Texas A&M (USA), Hong Kong University of Science & Technology (China) and Peking University (China)), concluded that when the unemployment rate increases from 5% to 8%, housing prices fall by 10,74%, and sales volumes fall by 5,49%.
High-end segment may not be affected
Davie Roodt, Chief Economist at Efficient Group does not agree with this study’s applicability to the SA market for many reasons. ‘A blanket study undertaken in the US does not make sense in our country’s case because, depending on the category of properties, house prices can actually increase when unemployment rises, especially in the high-end segment of the market.
“Well-qualified and wealthy people tend to move to high-security estates given the threat of an increase in crime which goes hand-in-hand with unemployment. This can and does push up certain property price segments,” he says. “Also, given that South Africa has strict foreign exchange regulations, wealthy people are limited by how much equity they can direct offshore when they want to hedge against economic headwinds and a falling Rand value.
“One of their strongest fallbacks is to buy local property because they know in time, the value will increase,” says Roodt. “Alongside we are also seeing a larger number of foreign investors buying property in SA because they view properties as dirt-cheap here when compared to their own markets. They are completely insensitive to the unemployment rate.”
Roodt states that while studies such as the aforementioned may have some value applicable to the middle and upper class, many of South Africa’s “poor” do own quite a lot of property, “but much of it is ‘traditional property’. In this we are unique,” he says.
All the effects
The unemployment rate influences the housing market in many ways. Lenders, for example, will not entertain the risk associated to a household without an income. Homeowners also become less willing to move because they have no guarantee that their job is secure. Buyers lose confidence in the economy and consider emigration. Housing construction and development may be stalled. Sellers are more reluctant to lower prices because they need every potential cent. And there is a strong likelihood of an increase in home loan repayment defaults, which will affect a credit score, and possibly for many years.
Changes in the property market size also propagates into the quality of homes on the market. When people lose employment, and most often this is low-income and blue-collar workers, they struggle to meet their home loan obligations. To ease this financial pressure they put their properties up for sale, which increases the number of homes for sale under R1-million, and more especially under R600 000. These are often properties that have not been well maintained due to the same financial pressure. Whilst we can say that higher income-earners who are under an unemployment threat may consider buying a more affordable property, those are often not in desirable areas, and this may indeed increase rental market activity.
Multigenerational living potential growth
This will apply particularly to young individuals - 15-34 years - where the unemployment rate has hit 445,5%. Such a statistic severely stunts the ability for Millennials and GenZ to enter the property ownership environment, and may even compromise their ability to rent. The multigenerational home, as a result, may be the favoured choice for families grappling with one or more unemployed members.
