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Is the South African Property Market a Bad Investment?

Aug 22, 2017
Is the South African Property Market a Bad Investment?

In the majority of developed countries, the property market is considered one of the most lucrative investment opportunities, given that general demand for housing has been increasing for a number of years. In South Africa, however, the story seems to be different due to a number of different economic reasons.  

Unlike other investment markets like forex, the property market is usually considered to move fairly slowly exhibiting less volatile behaviour. As a result, it can take some time for it to recover in the short term when it is suffering. Here are some considerations on the current state of the South African property market.

Cost of Building

Building a house from scratch has never been a cheap affair, but the cost of building a new property has increased by 10.3% year on year, which has undoubtedly impacted the property market. The price of buying new materials, developing land and property holding charges are all factors which, amongst others, have caused this rise in costs.

This means that new properties which have just gone onto the market or are still under development are likely to be even more expensive to buy, and so developers may well have a hard time selling them on.

Inflation

The South African Reserve Bank has been struggling with low growth levels and high inflation for the past few years, along with government pressure to put economic growth at the top of the agenda.

Despite now being down to 2015 levels, the high inflation rates have clearly had an effect on the South African economy, with consumer prices 5.1% higher than last year. The high inflation from the last couple of years will have contributed to the cost of building new properties, and made consumers poorer than before, meaning that less people can afford to buy a house.

The Rand                                                                                              

The rand is influenced by the laws of supply and demand, much like any other currency. It remains be seen how well it performs in the coming months, especially given the state of the economy, but a weaker rand is likely to damage consumer confidence.

It will also make it more expensive to import materials from other countries, which could well hit property developers and the construction industry hard in the short term. It may spark an interest in smaller sized properties, however, as people downsize to more affordable housing.

Tax Increases

The fact that the South African economy has entered a recession means that tax increases are a likely eventuality, and the property market could well suffer as a result. Should developers and consumers alike both have to pay more to develop/buy property as a result, it could reduce overall investment interest in the market.

It was recently announced that the tax exemption enjoyed by some South Africans is to be repealed, meaning that significant changes to tax are certainly being considered by the South African government. VAT is also about to rise, so consumers who are capable of buying property look set to face difficult economic circumstances in light of the rise in costs this will cause.  

Junk Status

The recent downgrading of South Africa’s economy to junk status has been a major blow to the country’s future prospects, and meant that every market, including property, has been affected by the poorly performing economy.

It looks as though it could be a while before things look up for South Africa, and this recent downgrading will only serve to damage investor confidence in the property market, especially for developers who now face much higher costs.

It seems the South African property market has taken a hit in recent times, although buyers may well begin to feel some benefits if house prices do fall significantly. Investors will no doubt face a nervous wait as the economy begins a slow recovery, and developers will have to endure higher material costs for the time being.