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Friday Dec 15, 2017

Property owners should brace for a tough 2018

South African homeowners and prospective buyers should brace themselves for a tough 2018 that could see property rates, electricity and water tariffs, and interest rates rise.

Consumers will need to tighten their belts and save as much as they can through the political and economic turbulence. Consumers are already under pressure, but last month's second downgrade to junk status is another sign that the political and economic volatility may take a further toll.

Low house-price growth and further affordability woes are also strong possibilities, economists say.

Ratings agency S& P Global joined Fitch in rating South Africa as below sub- investment grade - or junk, while Moody's placed the country on review to be downgraded.

However, as FNB's household and property sector strategist John Loos explains, the current economic and political uncertainty is the cause for concern, not the rating itself.

"The ratings downgrades have been coming for a while and we should be looking at the broader trend they reflect, such as weakening economic stability and government financial performance. Although ratings downgrades can affect certain investor capital flow, the ratings themselves are not the main problem. What they reflect is the problem."

Loos says economic and political volatility threatens the performance of the rand, and this is what people should be wary of.

"The rand is at risk and, should SA experience a major rand shock at some stage, this could result in significant imported price inflation and resultant interest rate increases."

Further deterioration in government and parastatals' finances could also see consumers being hit with various increases in municipal rates and utilities tariffs, which directly affect the costs of operating a home.

Loos says interest rate increases can affect consumers who are paying off mortgages.

"I would suggest that buyers purchase homes based on their ability to repay a mortgage loan at interest rates that are a couple of percentage points higher than what they are currently...

"If they cannot afford this then they should perhaps consider buying cheaper properties, or waiting a while longer and saving larger deposits."

Erwin Rode of Rode & Associates says, in addition, the combination of rising interest rates and a slower-growing economy is "bad news for house prices" as it affects affordability levels.

"Given the poor medium-term outlook for the economy, I am convinced that the housing market faces several years of price growth below inflation."

Nondumiso Ncapai, head of Business Development at Absa Home Loans, says the latest rating developments will add "further uncertainty" to confidence levels and the general economic outlook in view of the eventual outcome of the ANC elective conference this month.

"Against this background, the expectation is for conditions and sentiment in the residential property market to show relatively little change over the short term up to year-end, with the festive season likely to contribute to a slowdown in levels of market activity."

The timing of the downgrade was a clear "shot across the bow" for the political leadership to make some "dramatic changes" at its conference next month, says Lew Geffen, chairperson of Lew Geffen Sotheby's International Realty. No ratings agency wants to see a country slide into full junk status as it is not good for anyone.

"The government should view this as the warning. Right now the entire country is at a standstill, including the property market, waiting to see what happens at the ANC conference. If the new party president is someone with a strong business background, like Cyril Ramaphosa, it will go a long way towards raising investor confidence. If not, we're likely to be in trouble."

Currently, homeowners with high debt levels should brace themselves for interest-rate increases, says Adrian Goslett, regional director and chief executive of Re/Max Southern Africa. They should also focus on reducing their short-term debt and consolidate long-term debt by increasing repayments.

But Mike Greeff, chief executive of Greeff Christie's International Real Estate, says prospective buyers who may find it difficult to obtain credit for bonds or home loans should "not be despondent". Banks are still lending, provided that lending criteria can be met.

Property values in the Western Cape are also unlikely to drop due to high demand and stock shortages, Greeff adds.

One sure thing though is that, regardless of the economic state, property transactions will continue and sellers, buyers and investors should therefore not look at this latest downgrade as all gloom and doom, says Seeff Property Group chairperson Samuel Seeff.

"People need a place to live and that means that buying, selling, renting and letting is here to stay. We may see fewer transactions and flatter price growth during the downcycles, but business continues."

Sellers do need to be aware of the slow-down in demand and price growth, and will need to be more negotiable with their price expectations.

Consumer confidence following the downgrade will definitely also be negatively affected, says Anne Porter, chair of Knight Frank Residential South Africa. Capital outflow from South Africa is also "inevitable". However, she echoes Seeff in that she does not predict major sell-offs of residential property.

"These are people's homes. Bricks and mortar will continue to be considered a solid long-term investment... First- time buyers will be under interest rate pressure, but cash buyers will benefit from attractive deals, as will investors with foreign currency."

Amid all the economic anxiety Pam Golding Group chief executive Dr Andrew Golding says Moody's decision not to downgrade the country to junk but to rather place it on review will at least provide "some breathing space" until the outcome of the ANC conference.

The 2018 Budget should also be a better indicator of what is to come.

"From a residential property perspective (these two factors) are likely to be important and will be taken into consideration by property buyers and sellers in the new year."

Nonetheless, an ever-increasing demand for housing, along with younger aspirant home buyers and renters, semigrants and others who are relocating from one province to another and transacting, is fuelling the industry's endurance.

"While the forthcoming festive season does mean that for some, property-related decisions may be on hold during the holidays, for others it affords an ideal opportunity to plan for the year ahead and weigh up options to relocate for a wide variety of reasons, including upgrading, downsizing, career moves, leisure getaways, avoiding traffic congestion, retirement, or to acquire a property for pure investment purposes.

"In the major centres and busy hubs around the country, we believe that properties in high demand areas will remain sought after."

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