Siphamandla Mkhwanazi, FNB Property Economist, says the South African economy is expected to be in a short, but deep recession this year. The economy is expected to shrink by 4.5% y/y for the year – and that is the base case and considerably worse than the (-1.5%) contraction experienced in 2009. In this podcast, he speaks to Jackie Cameron, of BizNews, about the likely impacts of containing Covid-19 on the country’s property market, which he outlines in an in-depth report. “For the housing market, we expect a more dramatic impact on transaction volumes, rather than home values. House price growth will likely slow in the low to middle-priced segments, and nominal decline will deepen in the upper end to reflect weakening fundamentals,” he says. It’s a buyers’ market, though buyers are thin on the ground and deals are hard to get through, with logjams in the system. Also expect more repossessions as some property owners fail to secure extra financial help to survive what is likely to be a very challenging time, he says. – Jackie Cameron
Siphamandla Mkhwanazi is a property economist with FNB. He’s produced a fascinating report on Covid-19 and the property markets. Please take us through the key findings of this report?
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There’s doubt that the South African economy is going to experience a deeper contraction this year compared to the previous global financial crisis of 2008-2009. Our estimates show around 4.5% contraction. Then comes the knock-on effect on the labour market. We estimate the job loses to the tune of 35,000. For the property market it means – fewer people would demand housing or fewer people demand mortgages. The entire demand in the housing market is likely to drop.
The second one is that – because of sudden change in human behaviour – people have decided not to delay their purchasing behaviour, some sellers have taken their properties off the market in fear they won’t be able to attain their asking price, because the market at the moment is favouring the buyer.
The third impact is confidence. A lot of buyers at the moment are staying away from the market: just waiting for things to play out before they can dive back in and commit to substantial financial obligations. At the moment, the market is in a wait and see mode.
The biggest part is that we haven’t seen the worst in terms of income shock from a weaker property market – due to the weak economy. The exact impact of Covid-19 on the property market is likely to be more dramatic on the volume side, then on the price side. In China they experienced a much bigger decline in terms of volumes, but prices have been relatively the same.
In the South African context, there is going to be a comeback for the market. The weakness of our economy – pre-date the Covid-19 outbreak – the economy was already weak, so the interaction of these short -term shocks, as well it is long a weakness in the economy – which then works itself up to the situation with the property market remaining subdued for the foreseeable future.
Do you think there’s going to be an even greater shock than we anticipate? We’ve seen companies like Pam Golding and others putting their staff on long leave. Is this a clear sign that activity has dropped sharper than we might have expected?
Our preliminary data shows that volume has declined by 40% year -on-year in the first quarter in 2020, compared to the first quarter in 2019. Volumes were already low. This is exacerbated by the current lock down, nothing is happening at the moment. The market is almost at standstill, in the first 21 days, it will recover slowly, but unlikely that volumes are going to grow from last year’s levels. But if anything, the best-case scenario is that we’re close enough to last year’s volumes.
But at this stage, we don’t expect any growth in volumes this year, we expect a decline in volume in 2020. There’s been a sharper than expected decline in volumes because of the lockdown as buyers wait to see how the situation plays out.
Last time you mentioned that there was an excess of supply in rental properties – particularly newer properties – what do you see happening to that sector of the market?
There was extra supply in rental stock, particularly flats and townhouses, because demand didn’t match the supply. If you look at properties in the planning stage or the approval stage, it’s declined significantly to match the lower demand.
With this shock in this system, it is going to exacerbate that trend. It’s unlikely that any developer would want to flood the market with new stock with demand so low, and with these heightened levels of uncertainty, there are construction projects that have experienced disruptions and delays due to the unviability of raw materials and shortages of construction staff due to this lockdown. There is going to be a larger decline in supply of new stock because there already is excess supply in the market. If you combine that with our expected job losses, you end up with a situation where excess supply exacerbates the weakness in the labor market.
Do you think banks are going to be busy with repossessions in the next couple of months?
We’ve already started seeing defaults rising, but the financial institutions are more proactive than they were in 2008. In 2008, what exacerbated the problem, was a spike in repossessions, that pushed depressed prices further. This time around, there are more proactive measures than before. When a financial institution wants to repossess your property, they are a number of stages to be followed. For example, FNB has easy sites, where they can detect financial pressures before it becomes a default. That allows a seller to sell their property at a price acceptable to them, with the assistance of the financial institution. We are expecting those to increase, but not the same extent as we saw in 2008 – because of the current proactiveness.
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If you are a property owner who’s got a bit of a cash flow problem now, and it’s only going to get worse over the next couple of months as cash flow to the whole economy has basically been turned off. What would you suggest to people who envisage problems?
There are two types of sellers: Those that sell because of personal circumstances, for example moving to another province or selling because of financial distress. Those don’t have much choice at the moment, they are unlikely to get their desired selling price. But if you don’t have those pressures, I would suggest – wait and see. The most prudent thing is to wait and see and Get into the market when there’s some recovery. Low interest rates are going to help but not in the short term because we are yet to see that shock in the labor market but over time the very low interest rates are going to attract buyers back into the market. Low interest rates are going to be attractive for buyers to get back into the market.
You mentioned earlier, volumes will come under pressure rather than values, are they not interlinked. If you have lower volumes, doesn’t that put a lid on the values?
The impact would be on both – volumes and price, but it’s more dramatic on the volume side. It’ll show more on the volume side than on the price. In the South African context, prices have already been slow. We’re likely to see a price impact on the higher end of the market where excess supply. The lower end of the market is likely to perform better than inflation because of structural deficit – and the structural shortage of stock. The impact on price would be less than the impact on the volumes as volumes have declined about 40%, but we haven’t seen that on prices. In Hong Kong and in China where volumes dropped dramatically in places just slowed but they didn’t decline. They are interlinked. The impact will be on both, but dramatic on the volume side.
You mentioned the economy contracting by about 4.5 %, in Italy there’s a contraction of about 8%. Covid-19 fall out took them by surprise. Do you think 4.5 % is the worst-case scenario or there could still be some adjustments?
If there is an extension on lockdowns, that number is going to deteriorate. If the impact on the labour market is much more than we expect, that number is going to worsen – our number is the base case scenario. On the balance of probabilities, it’s likely to be worse than turning out to be better than a 4.5%. There is a higher chance that it’s worse than 4.5% then there is a chance of it being better than 4.5%. Judging by the fluidity of the situation, I wouldn’t be surprised if that number turns out worse than that.
Let’s hope you aren’t right. Well thank you very much for your time. That was Siphamandla Mkhwanazi from FNB.
