INTEREST RATES AND PROPERTY PRICES: : A LAYMAN’S PERSPECTIVE
This commentary is from a layman; I’m no financial expert; I just happen to be involved in the real estate business - and am well old enough to believe that history can usually teach us something about the future!
Take a look at the graph below. It goes back as far as 1980; 29 years can you believe! So here’re some observations, as I say again, from a layman’s point of view.
Firstly, all of those of us with mortgage bonds to service, probably don’t like to recall when we were paying a quarter of our loans off every single year, when the rates exceeded 25 % - and yet our peak this time around, appears to have been a somewhat sober 15.5 %, compared to those radical days of ‘84 and ‘98!
But take a close look. There have been six distinct up and down interest rate cycles over the last 30 years - and for us South Africans, this current cycle is numerically, the least volatile and one of the shortest!
Over the period in question, the Prime Rate has never been under 10 % in South Africa! So what would make us think that it might now dive under that level to single digits? - maybe even replicating the UK, with its current half-a-percent nonsense?
Some commentators might say that we’re in the worst financial crisis since the Great Depression and all previous benchmarks are therefore up for obsolescence but bear in mind that, over the last 30 odd years, this country has been through 1) an all-but Civil War 2) two “we’re all doomed now” reactions to successors to President Mandela and 3) two other financial meltdowns; the first christened Black Monday in 1987 and of course, the later financial maelstrom of 1997/’98, blamed primarily on the over-heating of the Russian and Asian markets - yet still never below 10 %!
So, will we see Prime at much below 10.0 % therefore, as a result of the so-called Credit Crisis? History and statistical analysis wouldn’t support such a theory, I wouldn’t have thought.
And then what about house prices? Let’s look at the real stats. The graph below reflects year-on-year price escalations in the Western Cape over the same 29 year period. Sure, we as real estate agents enjoyed the period 2002 to 2006 - who wouldn’t have, with an average of 20 % plus per annum increases? I guess it doesn’t really matter what the root cause of such price inflation was. When looking back, most of the experts said it was all part of a … “global market adjustment” - they may well be right.
But let’s reflect on the averages over that entire tumultuous period. Good old property has kept on producing a + 15 % year-on-year escalation. Hooray for Property!
So, where to from here? … 2010 and the hosting of the World Cup in South Africa has become a sort of starting gun for recovery. Almost all the people involved in real estate will tell you that the recovery will be starting before the back end of this 2009 year. But make no mistake, it’s happening now! In my business as a real estate broker, I try to conduct at least 3 to 4 Sunday afternoon Show Days a week. As recently as 8 weeks ago, from my Show Days, I was averaging about 1 to 1 ½ visitors per property.
Two weeks ago, I had 27 sets of visitors through 3 Show Days, so the man/woman-in-the-street is definitely getting off the fence and back into the marketplace! And these were genuine buyers for places to live in, in the R 750 000 to R 1.5 m price band - not cash-rich investors.
So, just a layman’s perspective, from someone who makes their living out of property.
I’d more than welcome your comments or feedback; either by email on dave@remaxpa.co.za; via cell on 082 449 3100; or via my Blog - From Dave’s Desk - on http://fromdavesdesk.blogspot.com/
Cheers for now,
Dave J
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