“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”
– Rode & Associates CEO Erwin Rode, quoted on HomeTimes March 2016
Now that it has happened
Two property professionals weigh in on what the downgrade of South Africa to sub-investment status will mean for the country’s property market, and economy in general.
“A junk status means that it will cost more for the government to borrow money, which in turn will have a knock-on effect on the consumer. Financial institutions will need to hold more money in reserve, which will make it more difficult to obtain credit, and the credit that is granted will come at a higher cost… Pay down short-term debt and consolidate long-term debt.”
– Adrian Goslett, regional director and CEO of RE/MAX of Southern Africa.
- The cost of debt will increase, consumers across the board will need to brace themselves.
- The increased cost will dampen consumer demand for items such as homes and cars.
- Foreign investment will decrease, the price of assets will follow suit and then the currency will depreciate. The country will struggle to improve back from junk status; it takes seven to eight years to recover from a downgrade according to research by Rand Merchant Bank.
- Infrastructure funds will take a knock.
- The higher cost of credit will slow the building sector, as developers will struggle to get financial backing.
- The upside according to Goslett: “Investors with access to cash will be able to benefit from the predicted price stabilisation or decrease and will have more negotiating power in the market. The tourism sector will also benefit from a weakening rand as travel to South Africa becomes cheaper for those with foreign currency.”
“There is no need to panic and it is not all doom and gloom. We expect business as usual for the property market.”
– Samuel Seeff, chairman, Seeff Property Group
- It must be remembered that the threat of a downgrade has been looming for the past 18 months.
- Although the latest political and economic shifts have been negative, the downgrade has in many ways already been priced into the current trading markets
- It is expected that the property market will remain stable for the time being with any real effects only filtering through later in the year
- That said, one cannot ignore that t”junk status” sends a major blow to consumer confidence and will have a longer term negative impact on the economy. The need for political and economic stability cannot be emphasised enough.