South African Property News

Rode's Take on the Current Property Market

An interview with property economist Erwin Rode of Rode & Associates indicates that the house party most South Africans have been enjoying over recent years is officially over for now.

There has been much debate among property experts lately, with one side arguing that the current scenario is merely a “bump” in the road that will soon “head skywards”, while the other side predicts a “continuing downward spiral for the foreseeable future”. Rode suggests that before coming to any rash predictions about the future, it is first necessary to clarify how we got here in the first place.

The residential property boom experienced in the early years after the millennium is a once-in-twenty-years experience. “We must remember that it came off a very low base to begin with, and coincided with the longest business-cycle upswing (which started in 1999) that the country has ever experienced,” according to Rode. The combination of steady economic growth and low interest rates managed to spur on the market into “a state of euphoria”. Rode says that these expectations of growth are often “self-fulfilling” and that all these factors resulted in a “sustained – but unsustainable – growth” that far outweighed income growth and replacement costs. This inevitably led to houses becoming that much less affordable.

Rode believes that what is happening now amounts to a “natural period of consolidation” and that the struggling world economy, rising interest rates and the continuing electricity crisis in the country have merely sped up the cycle. Obviously, Standard Bank’s recent findings that house prices have declined for the first time in 8 years and the recent interest rate hike of 50 basis points by the Reserve Bank have done little to ease the panic in the marketplace.

Rode says that, “We should bear in mind that the effect of a change in interest rates is only felt three quarters (nine months) down the road, and high nominal interest rates are going to be with us for a long time to come. Thus the 2010 enthusiasts in South Africa might like to rethink their predictions of a property boom induced by the soccer World Cup.” He adds that, “A one month tourist orgy was never going to create a boom.”

The information in this article is courtesy of Rode & Associates (“The house party is officially over for now”, www.rode.co.za, 16 April 2008).

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