There are two schools of thought on a possible downgrading of South Africa to junk status. One is that the financial markets have already discounted the derating. The other is that there will be more fallout should this happen.
Rode & Associates CEO Erwin Rode says the housing market is very much influenced by what happens in the economy in general. “Junk status will without a doubt slow down economic growth even further. So the effect on the housing market will be that house prices will grow at even a slower rate than otherwise. Say if they were to grow at 3%, they would stop growing completely in nominal terms. However with inflation at 6%, they will decline quite sharply in real terms.
“In the past, the worst nominal decline was 10% over a two year period, in 1976, during the worst recession. This happened in either 1976 or 1986, or both. But I don’t expect the decline to be as severe this time. The important implication of this is that investors should not be looking to house prices to appreciate in the short term, unless of course they pick up a bargain from a forced sale. Most buy-to-let investors make their purchases for their capital appreciation. I don’t think we are going to see much growth over the next two years. That applies to every investment channel”.
Harcourts Africa CEO Richard Gray is also not optimistic about the prospects for growth over the next two years in the event of a downgrade.
“The decision by international ratings agency Moody’s to place South Africa’s Baa2 bond and issuer ratings on review for downgrade has serious consequences on the short to medium term property market. If South Africa gets downgraded it will be one notch away from junk status and this is not a position we want to be in,” he says.
“If this indeed does happen the immediate repercussions will see the rand grow weaker as investors and lenders pull out of South Africa. Many foreign investors are only mandated by their backers and funders to lend in certain markets and a downgrade may trigger a significant number of these mandates to force them to withdraw the investment.
“Positive sentiment in our economy assures foreign investors that their investments are stable and that growth is a probability. As soon as international ratings agencies lose confidence in our forecast, so too do global investors.
“This will undoubtedly force higher interest rates to counter the weak rand and the exit of investment. Higher interest rate will reduce affordability for potential buyers. Coupled with this, the consumer will be hard hit with increased prices of most items e.g. electricity, as Eskom pays more interest on debt and capex.
“Buyer sentiment will turn very negative and even local people will be scared to invest in the country. The high rates, low affordability and negative sentiment will slow the housing market down significantly.
“The silver lining is that foreign buyers will find it easier to buy here with the weak rand, but given the small percentage of foreign buyers, this will not reverse the negative trend.
“So we really have to hope that Finance Minister Pravin Gordhan can convince the ratings agencies that we are going to be able to stimulate growth and cut spending,” says Gray.
“However, as I’ve always maintained, property is a long term bet and therefore usually remains resilient to market fluctuations. These problems will hopefully not be with us for more than a year or two and I foresee our economy regaining stability and growing stronger as time goes by.”