Property Up, GDP Down: Is this sustainable? (The Bugle)

We have an interesting anomaly that has developed recently. Our property market has remained buoyant in the face of a deteriorating general economic outlook. Our sales figures are up while GDP growth rates are down and the SARB Leading Economic Indicator is showing a further weakening in the near term. To some extent we can explain this by suggesting a level of pent-up demand is now after six years of flat price growth, being released. It was a relief that the May meeting of the Reserve Bank’s monetary policy committee decided to keep interest rates unchanged despite CPI inflation breaching the 6% upper target limit range. This counter-cyclical evidence is unusual and raises questions as to the sustainability of the current demand surge for property that we are experiencing. Transfer duty receipts by the government is an excellent way to measure the property cycle and by watching these figures closely we can get an indication of when the general trend reverses and we start heading in the opposite direction. The April figures published at the end of May still showed robust growth in transfer duty receipts, with year on year growth rates at 24,3%, but slightly lower than the 25,7% of March and significantly lower than the 49,4% recorded in January 2014.  The current sideways movement in transfer duty receipts growth rates is expected to change to a slowing growth rate during the second half of 2014. If you were to analyze the last 100 transactions through our office you would find the average time between date of sale and date of transfer is 90 days. Any slowing in property sales activity would therefore typically be noted three months down the road.

Even though the FNB House Price Index showed growth of 8,1% in May 2014, up from 7,9% in April, economists are warning us that there are indicators that suggest a slowdown in growth rates is looming. When clouds begin the gather you need to understand the potential risks and opportunities that may present themselves. We saw that real economic growth for the first quarter declined by  -0,6% - the worst quarterly performance in five years. The impact of the Platinum miners strike has made itself felt. When 70,000 relatively well paid miners strike for a lengthy period, the cumulative impact on the economy can be surprisingly severe. Retailers exposed to the purchasing power of this group would most certainly have experienced a dramatic drop in sales. Disposable income is another key statistic that has been on the decline. Compensation to employees measured a 7,85% year-on-year rise in the first quarter of 2014, representing a third consecutive quarter slowdown. When people have less money to spend, we can expect decisions to buy properties harder to make. Herein lies the opportunity. The buyers market will continue, rentals will continue to rise and pricing will remain relatively flat. All great news for property investors. I have already identified the best buy-to-let opportunities and yields are edging upwards.

Published in The Bugle, 11 June 2014, Author: Andreas Wassenaar