How does Junk Status impact the Property Market?

Benhard Wiese, Owner at CCH (Cape Coastal Homes / City Country Homes) writes a very interesting article regarding the recent downgrade of South African’s investment status, and how this will impact on the South African Property market.

How does Junk Status impact the Property Market?

Benhard Wiese, Owner at CCH (Cape Coastal Homes / City Country Homes) writes a very interesting article regarding the recent downgrade of South African’s investment status, and how this will impact on the South African Property market.

The rating agency S&P’s downgrade of South Africa to “junk status” means that the cost of credit will increase for all South Africans. This sub-investment status will have a negative impact on the property market and consumers as a whole – necessitating a quicker repayment (if possible) by every consumer of his or her short and long term debt.

The avoidance of a downgrade last year was a period of grace “offered” to the SA government to bring about policy stability. The unexpected reshuffle by the government on Saturday brought about a very swift rating turnabout.

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 – placing more pressure on consumers who are struggling with the growing cost of living due to food price inflation (due to drought) and rising home services bills (water, electricity and property taxes).

According to economist Dawie Roodt, the market have already made provision and priced in the effects that a downgrade would have on credit costs – as it is showing in the less than expected fall of the Rand’s exchange rates.

A rising in the “cost of credit” will inevitably lead to an increase of the interest rates for homeowners and will have a resulting dampening effect on property buyer’s demand. This is not good news for the SA property market which has already, with the exception of the Western Cape property market, experienced a significant drop in capital appreciation during 2016.

The high capital growth patterns experienced in especially the more sought-after lifestyle property regions of the Western Cape such as the Atlantic Seaboard (where up to 18% if the buyers are foreigners), could during the next year experience a much lower price increases – should the downgrade lead to a drop in foreign demand coupled from a possible rise in properties for sale by existing foreign owners.

Everyone is at present of the opinion that South Africa’s recover from this downgrade will take at least a few years – even up to 8 years as per a Rand Merchant Bank research piece. This is does not bode well for the government’s ability to maintain and upgrade infrastructure – such an important part of any areas property market growth patterns. The higher cost of credit will also slow the building sector as developers will struggle to get the financial backing they require to initiate further projects.

It is still very early to predict a new wave of defaulting property owners due to the increased cost of credit. Property price growth most probably would however be curtailed – providing an opportunity for buy-to-let investors, as especially the first-time buyers market segment will probably need to save up more for bigger deposits in order to gain access to home loans.

A weaker Rand will definitely be a big positive for the growing so-called swallows group – i.e. those foreigners and “repeat” tourists who returns regularly to our shores. They have during the last decade discovered the great value for money South Africa offers them.

 

Posted by In2Assets