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Oct 26 2010

SA’s property bubble: realism at last

Published by at 8:58 am under South Africa,Top Stories

At last, someone (in the industry) has had the guts to say what should have been said a long time ago: SA sits on a property price bubble.

I’m referring to this article on Fin24. (Also look at this comment of mine dated 11 December 2008.)

And, like all price bubbles, this one will deflate sooner or later. In fact, the deflation (of prices) has been underway for almost three years now – many just don’t realise it yet. Or, don’t want to know about it. Or, even better: can’t afford to hear about it.

Who was responsible for this bubble? South Africa’s banks (with their too lax credit extension….in fact, in many ways the story reminds of the American experience).

To their credit, they acknowledged the problem a while back and started to deflate the bubble. Without telling anyone, of course. Simply, by turning the screws on new home loan extension. And this process is still underway (the process of property bubble deflation). The major difference between the US and SA experience: in the US the bubble burst from one day to the next; in SA the bubble-deflation is being managed carefully and slowly (and quietly) over a long period by the banks.

The clear words of John Loos will now (at long last) bring the message of what’s been happening in the property market for a while now through to the people. So, expect asking prices to start dropping strongly in coming months (and even years). And sales to be concluded at much lower, much more realistic levels (with some relation, for instance, to what one can realistically extract from a tenant).

In Germany, for instance, home prices are easy to calculate. And they seldom, very seldom, deviate from this calculation: Monthly rental you can realistically expect to get for your home x 12 x 20 years = market value of your property. Finish and klaar….nothing more. No-one will even touch your home if you try to ask a cent more than this “market value”.

That is, of course, also how prices should be calculated in SA. (Although, I don’t think SA property prices will ever get THAT realistic…and there are a few important differences between the property markets of the two countries.)

A final thought: once the property bubble has deflated, the majority of white South Africans (who have been living off the idea that property prices always rise) will find themselves a lot poorer. That’s when the reality of living in the new South Africa will really start hitting home…

One response so far

One Response to “SA’s property bubble: realism at last”

  1. Hennie Volschenkon 26 Oct 2010 at 11:16 am

    I cannot agree more with this realistic view of the property market in South Africa. The residential market, previously targeted by developers as a major opportunity, has suddenly dried up and the focus has shifted to more affordable housing at realistic prises where volume and not margin is now at the order of the day. Financiers have also become realistic in their target profiles of current and new clients, which will also bring a sense of realism to the residential market.

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