Panic is growing in residential circles, but some reckon they can see the light at the end of the tunnel.
James Templeton, chief executive officer of listed property company Emira (JSE:EMI), remarked to Realestateweb this week that in markets like these, the focus is always on negative comments. This followed the news that South Africa was no longer looking so rosy in the eyes of credit ratings’ analysts.
In a bull market, news like that would have been shrugged off, is his view. Now, though, people are looking for “another reason to sell”. Listed property is down about 20% since the beginning of the year.
Responses to articles on Realestateweb this week seem to confirm Templeton’s theory. Early voters agreed that residential property prices are set to “drop like a stone”, according to a poll under the article “If I could short property I would”.
That article was written by a lawyer who invested his way to financial independence through residential property before the age of 40. Surveying the investment landscape now, he sees only dark clouds on the horizon.
He said heavily-indebted owners should sell and buyers should hold back for at least nine months. “The prices are affected by the perception of value of lenders. These two – the price and perceived value – continue to reinforce each other until there is a complete dislocation and the crash follows.”
“Thus, banks are prepared to lend more and this then affects the price, that is the property seems to be worth more, and so the banks tend to lend even more and the value increases. This continues until banks realise that the asset is no longer worth what they are lending and they slow down or stop lending.”
Then the reverse happens. As banks lend less, property is worth less. “House prices are starting that reversing process as we speak. Combine this with the political uncertainty, large number of foreclosures, an economy that is taking strain against the world wide credit crunch and you have the makings of a perfect property storm,” said the property investor.
In the UK things are looking ugly, with bank credit analysts believing prices will continue to fall and that there are more interest rate cuts in store. Elsewhere, market watchers believe the global economy will not bounce back quickly leaving the graph in a “V” shape.
The picture looks uncertain in South Africa. Respected property economist Erwin Rode, of Rode & Associates, said any bad news for the country is bad news for property in the long run.
The credit rating news implies that we will have to pay more for foreign loans and that in turn might affect domestic bond markets, pushing up yields. Add to that government’s “pretty heavy” loan programme and you have a “toxic combination”.
Long-term debt will become more expensive, said Rode. This in turn will slow down the whole economy. “Too many parts of the world have lived beyond their means for too long. You have to pay back sooner or later,” he said.
Some in the industry are more optimistic, though. Even Lew Geffen, who grabbed headlines after an internal company memo revealed that he expected prices to plummet earlier this year, is more upbeat these days.
He told Realestateweb, in a look at the year ahead, that now is a fantastic time to buy.
“If Warren Buffett was here, he’d be buying everything,” reckoned Geffen. “You’ll never get the exact bottom, but you will get within the range of the bottom of the market. If you can get money, buy,” is his advice to anyone contemplating residential real estate.
So, who are we to believe? As Rode said, there is an “amber light flashing”. Catastrophe may not be on the horizon, he points out, but we might, in South Africa, be living in a fool’s paradise. Bear this in mind when contemplating your personal financial affairs, he advised. “There are many people who may not have their jobs a year from now,” he cautioned.