How to Survive the Global Market Crash

(Accessed from www.realestateweb.co.za on 10 October 2008)
Jackie Cameron*

Survive the Crash

While the world has been inundated with news about plummeting stock markets, financial systems in trouble and anticipation of a global recession in the last week, there are some estate agency bosses in South Africa that appear quite optimistic about the state of the local market.

Recent statements from Rawson Properties, Pam Golding and RE/MAX have been upbeat, suggesting that we may well have seen the worst in the residential market and things are set to improve. News that interest rates will remain unchanged has reinforced this hope and a sudden surge in sales and increased attendance at show houses are also positive signs for the property market.

However, there are those who believe that the views of estate agents should really be taken with a pinch of salt, as they have never been known to speak negatively about the market even when things are looking seriously dire. One has to ask whether the improvement in sales is really a sign that things are looking up? Or is it merely a ploy to inspire buyers who have been sitting on the fence?

According to Bill Rawson, sales for his group were up an incredible 250% in September and he urged that, “Despite the difficulties with getting bond finance, now is a wonderful time to buy. This is a message we need to put out into the market, which in its reaction to the downturn has now grown overly cautious and negative. Property remains a top-line investment and this has never been truer than in today’s tough sale conditions”.

Rawson is right in that property is an excellent long term investment. However, in the short term, those who take out mortgages and rent are likely to experience tight financial conditions at the very least. Many businesses and consumers are bound to fall into money trouble at some point and banks are far stricter in their lending criteria.

ABSA has been tracking trends in house prices for decades and only expects the situation to turn around at some stage next year. Real property prices, taking into account inflation, have dropped by around 10% annually, which means that purchasing power has been lost if your cash has been held in bricks and mortar.

Barry Sergeant’s analysis of the South African economy seems to point to tougher times ahead, not easier ones (Moneyweb). He believes that interest rates can’t be cut in line with the globally coordinated central bank packages simply because our economy is not in good shape.

He says that with the staggeringly high unemployment rate and trade deficits, as well as the minimal foreign reserves, the country is left “with little choice but to perform somersaults, and other awkward things, to attract foreign cash inflows”. Sergeant notes that investors tend to borrow elsewhere at a lower interest rate and then send their money over to South Africa to earn more and make a profit.

Mike Flux, executive director of Madison Property Fund Managers, also seems to be more pessimistic about the situation, primarily due to economic reasons. He warned that up to a third of jobs in the property sector could be lost over the next two years. “Add in more global meltdown, multiple recessions, plus a dash of Zuma election fun and we are in for interesting times” (Realestateweb).

The fact that interest rates weren’t cut this week shouldn’t come as a surprise. Reserve Bank governor Tito Mboweni cited a reason for the decision as being that “wages show inflation expectations are not anchored”. His own salary increase says a lot about this, with an annual raise of 30%, which is considerably higher than inflation expectations.

What about those of us who earn ordinary salaries though? The reality is that we need to get back to old fashioned basics. Draw up a budget listing your income and all of your bills and then trim the unnecessary monthly expenses. Perhaps it’s time to revisit your car and household insurance, either insisting on a reduction in your premium for your car that is now a year older or shopping around for a better rate.

You could even look at swapping your home loan for a better deal. Banks, like insurance companies, are not likely to reward you for all the years that you have been in business with them. Perhaps it’s time to trade in your car for a more economical one or to change your cell phone contract to pay as you go. It is amazing how much you can save from cutting out the unnecessary treats and shaving costs here and there adds up.

Buy property in South Africa.