The property market has turned, but it has not yet gathered momentum. Reg Rumney reports
The property market is at long last showing signs of a sharp revival. Boland Bank’s latest Economic Review notes that both the value and volume of property market transactions have been accelerating gradually for around 12 months.
The reason is a combination of causes, says Boland, related to the uncertainty before the election and the better outlook after it.
Faithless South Africans were eager to get rid of their property, and this was snapped up by those with more faith, accelerating property deals even before the election.
Afterwards transactions picked up for another reason: South Africa suddenly looked less risky and foreigners and locals were encouraged to acquire property.
“What should not be overlooked, however, is the fact that extensive ‘hoarding of property transactions’ occurred during the unstable two years leading up to the election and that the shift in perception of South Africa’s political risks in recent months merely served to unleash these transactions,” reported the bank.
The total value of transactions during the nine months to September 1994 rose around 27 percent compared to the same period in 1993. The number of transactions over the same period rose 10,5 percent.
There are no statistics to show this has led to any market pick-up in formal construction, says Boland.
For example, the real value of buildings completed dropped by a further 12,2 percent during the first 11 months of 1994, after average annual declines of 7,2 percent between 1990 to 1993. Total construction activity dropped by an estimated 4,5 percent during 1994, and is still around 42 percent below the 1990
Surplus capacity in the non-residential market is the reason here. Also, large-scale, low-cost house building projects are still hampered by the time-consuming creation of administration, says Boland.
The bank puts the turning point in construction another six months away at least.
Building costs, however, are starting to rise as shortages of men and materials start to be felt. Building costs increased by 9,9 percent in 1994 against a relatively low producer price inflation figure of 8,2
That shortages have been felt so soon signals that the years of declining real capital spending may have more seriously depleted available production capacity than is generally supposed.
The cost of mortgage bonds are another cost-dampener. Boland says there is a good chance of another percentage point increase in interest rates. Some economists expect two more.
>From a pure investment point of view, Boland Bank notes: “With the exception of certain coastal regions and selective niche developments, real returns on property were mostly negative.” That seems about to
“Everything points to the South African economy having entered a relatively long growth phase, thereby creating important investment opportunities in the property market.
“As a rule, property responds to the business cycle with a lag of 12 to 18 months, and the relatively short, artificially initiated growth phases of the Eighties never really provided the scope for property investments to come to fruition.”
The report goes on to say property is one of the few investment instruments which can be recommended with reasonable confidence now, and that the present property cycle is likely to peak in 1997.
In short, investors and homeowners alike should benefit from the coming boom in the next two years in the property market and the construction industry, says
It is just as certain, the review cautions, that cost pressures — and ultimately affordability — will mean the “formal”, as opposed to socio-economic housing projects, will need another breather within three