Data analytics company Lightstone provides a forecast of what South Africa’s property market is expected to look like once the lockdown is lifted.
Before the Covid-19 crisis hit, the group estimated that during 2020 national house price inflation would drop below the 0% barrier for the first time since the 2008 economic recession.
With the added pressure brought on by the Covid-19 pandemic, Lightstone has now revised its forecast to include three scenarios with a view on how those economic scenarios might play out in the residential property market.
The three scenarios are part of a range of possibilities that data scientists have run through forecast models to assist our clients in making sense of the residential property market in a post-lockdown economy.
“With very little or no certainty on how this black swan event will ultimately play out, we decided to model three scenarios based on the GDP dropping between 3% to 10%,” said analytics director, Paul-Roux de Kock.
Scenario 1 – Generic Recession
House price inflation is forecast based on the assumption that the GDP may decline by 3% with a subsequent deflationary effect on consumer price inflation.
The reduction in CPI inflation leads to a further drop in interest rates making goods bought on credit more affordable. In this scenario, Lightstone expects house price inflation will end the year at -3.9%.
Scenario 2 – Unchartered Territory
“A negative house price growth of 8.8% sounds alarming, however when we look at the 2008 property crash, house price inflation dropped to as low as -5.4% during a time when economic growth only declined by 1.8%,” Lightstone said.
This scenario assumes a drop in GDP of 6% without a noticeable reduction in CPI inflation, leaving limited moving room for further interest rate adjustments, it said.
Scenario 3 – Extreme case
Lightstone said that it stretched its forecast models – which was not built to perform under such extreme conditions – to its maximum.
It assumed a negative GDP growth of 10% with an increased reliance on expensive imports due to the weaker currency ultimately driving CPI inflation up and forcing the Monetary Policy Committee to reverse the downward interest rate cycle.
In this scenario, it predicts that house price inflation could end the year off at –14.5% but warns that under such conditions “all bets are off” as the usual predictive interplay between GDP growth, CPI inflation, interest rates and house price inflation will start breaking down.
While these forecasts are grim, Lightstone said that the property industry, as with many other industries, will undoubtedly adjust to new ways of working.
Recently, under the new rules of Level 4 lockdown, the deeds offices are open, enabling real estate agents to be allowed to lodge and register properties again, and possibly close existing and prospective deals, it said.
“However, as things currently stand, estate agents will only be allowed to function fully under Level 2 so agents who traditionally depended on physical viewings with clients are resorting to more creative and digital ways of serving their clients like virtual viewings and making use of Lightstone valuation reports to conduct negotiations between buyers and sellers.”
Lightstone said that the luxury market segment will continue to suffer even more than it did in previous years under all scenarios tested.
“It is important to understand that we are operating in extremely uncertain conditions and that the exact outcome is impossible to predict with very little insight of when the government will announce further easing of economic restrictions,” said de Kock.
“At this stage, the only certainty we have is that ours, as well as many other economies across the globe will have to work harder and smarter in the post lockdown recovery phase.
“It is, therefore, crucial for businesses to have agility around their strategic plans to enable them to rapidly respond to any scenario that may play out.”