After years of dullness, the property market is starting to promise excitement. Reg Rumney reports on one economist’s brave forecast
IF you are thinking of buying property, or of selling your house to move into a more expensive neighbourhood, don’t put off the decision. Buy now, says property economist Erwin Rode.
Hold on, you may say, that is the theme tune of estate agents, who are always trying to talk the house market up by predicting soaring property prices.
The difference is that Rode backs up his advice with statistical information. To be sure, his method is not infallible, but it beats astrology or the Tarot cards.
”We are in the trough of the property cycle,” says Rode.
”This is one of the two occasions in one’s working life where one has an opportunity to buy property cheaply. Don’t do it and you can call yourself an economist,” he joked, addressing the conference in Sandton this week.
Rode’s observations apply to both housing and office space.
He has been making the brave prediction at the annual conference he holds that house prices will rise by 20 percent next year, and that prime office rentals will rise by an average of 19 percent in at least one central business district.
Rode’s forecasts generally depend on certain assumptions about the good behaviour of the new government in economic terms, assumptions not shared by the capital market, which has expressed its pessimism about the future of inflation through long- term interest rates that hit 17 percent this week.
Boiled down, Rode’s belief is that ANC politicians realise they will only be judged at the next election and not before. So they will not be tempted to pump money into the economy to have a false boom in 1996. They will aim at maximum growth by 1999, and pursue responsible policies to attain this goal.
An independent Reserve Bank, which the ANC favours, means the fight against inflation will not be deserted, Rode contends.
Contained inflation means mortgage bond interest rates, for instance, won’t have to be linked with all other rates.
This in turn makes buying a house more affordable.
It’s accepted that one of the best investments the man in the street can make is to buy his own home. Money that would be lost in rent goes towards a long- term capital investment instead. Why would one lose out by not buying now, though?
The answer is that quite aside from the upswing that has already started, Rode is looking at the long property cycle.
The long property cycle, according to Rode, is around 18 years from trough to trough. The business cycle is much shorter. He reckons there are around four four business cycles within each long property cycles. And there are shorter and less important up and down property market movements within that long property cycle. But the troughs and peaks in the long property cycle always coincide with the troughs and peaks in the business cycle.
Property is subject to long upswings and downswings because of its underlying durability — it is ”consumed” over decades. Also, adds Rode, the gestation period of new property supply is long, and it is virtually impossible to get equilibrium as the cycle alternates between long periods of undersupply and oversupply.
Upswings in the property cycle are driven from both rising costs, largely building costs, and by the increasing demand for space as the economy grows.
Rode’s optimism is clear: ”From the demand side, the fundamental factors are now in place for stronger economic growth over the next few years. In addition, historically in South Africa, economic booms have coincided with periods of political stability, such as that which we are now entering.”
The implication is surging demand for space will quickly mop up residual oversupply. This will mean new building. The cost of these new houses or office buildings will in turn be pushed up by steeply rising building costs, so pushing up rentals or housing prices.
For housing, a rise in prices seems overdue. According to Rode’s index of house prices, adjusted for inflation as measured by the consumer price index, by the end of 1993 all housing except for Cape Town fell in real terms below the price level reached in 1987.
Rode also expects flat rentals to rise by 17 percent next year, not as strongly as housing, because of the distortions in the market.
At best the implication of long upswing phase Rode expects is that the second half of the 1990s will yield particularly good property returns, indeed far better than most of the 1980s.
At worst we are facing a property mini-boom similar to that of the late 1980s and early 1990s.
Rode comments that this created for a short time many opportunities for profiting from property investments. Housebuyers, however, should be looking primarily at property as a long-term investment.
The cycle does not include factory space, where rentals are expected to rise next year, but where other factors are shaping demand. One such factor is security, so industrial parks and hybrid office and industrial complexes are becoming increasingly popular as executives strive to move their operations away from older industrial areas next to black townships, which they see as crime-ridden, and closer to their own homes.
TABLE
Prime office rentals in the main central business districts Nominal average growth for the year
1993 1994 1995 percent
Johannesburg 6 6 14
Sandton 4 6 18
Pretoria 4 8 14
Durban 1 5 14
Cape Town 0 7 19